Housing starts and permits spike in May as sentiment improves

REAL ECONOMY BLOG | June 20, 2023

Authored by RSM US LLP

Housing starts and permits came in much stronger than expected in May as the housing market continued to improve off its low in 2022.

The upside surprise raises our forecast for gross domestic product in the second quarter from a 1.5% increase to 1.8%.

There were 1.6 million new housing starts in May—the most in two years and a 21.7% increase from the previous month, according to government data released Tuesday. Building permits, a leading indicator for future starts, also rose, by 5.2% to 1.5 million.

The upside surprises were consistent with builders’ improving sentiment, which increased to an almost a one-year high, according to the National Association of Home Builders index released on Monday.

But that increase might not last long as the Federal Reserve’s new forward guidance for more rate hikes won’t show up in the data until the next release.

Still, with the Fed near the end of its rate increases, it is likely that the housing market bottom is in the rear-view mirror, barring any economic shock.

We expect the market to show gradual improvement instead of a quick recovery as the probability of a recession remains elevated.

At the same time, the era of near-zero interest rates might be over as inflation becomes stickier above the Fed’s 2% target rate.

Inside the data, multifamily housing led the rise in starts, increasing by 27.1%. Single-family starts rose by 18.5%. Completions increased by 9.5% after falling by 9.3% in the prior month.