By Lucia Mutikani
WASHINGTON U.S. homebuilding unexpectedly fell in May, but data for the prior two months was revised higher and building permits increased, suggesting that the housing market was drawing some support from a sharp decline in mortgage rates.
Housing starts dropped 0.9% to a seasonally adjusted annual rate of 1.269 million units last month amid a drop in the construction of single-family housing units, the Commerce Department said on Tuesday.
Data for April was revised up to show homebuilding rising to a pace of 1.281 million units, instead of increasing to a rate of 1.235 million units as previously reported. Housing starts in March were also stronger than initially estimated.
Economists polled by Reuters had forecast housing starts edging up to a pace of 1.239 million units in May.
Single-family homebuilding, which accounts for the largest share of the housing market, dropped 6.4% to a rate of 820,000 units in May. Single-family housing starts fell in the Northeast, the Midwest and West, but rose in the South, where the bulk of homebuilding occurs.
Some on the weakness in groundbreaking activity likely reflects heavy rain and flooding in some parts of the country.
Building permits rose 0.3% to a rate of 1.294 million units in May. It was the second straight monthly increase in permits. Building permits have been weak this year, with much of the decline concentrated in the single-family housing segment. The housing market hit a soft patch last year and has been a drag on economic growth for five straight quarters.
U.S. Treasury yields held near session lows after the data, while the dollar was firmer against a basket of currencies. U.S. stock index futures were trading higher.
The housing sector is being constrained by land and labor shortages, which are making it difficult for builders to fully take advantage of lower borrowing costs. As a result, the housing market continues to struggle with tight inventory, leading to sluggish sales growth.
There are concerns that renewed trade tensions between the United States and China could hurt future home building.
A survey on Monday showed confidence among homebuilders ebbed in June, with builders continuing "to report rising development and construction costs, with some additional concerns over trade issues."
Builders said that despite lower mortgage rates, "home prices remain somewhat high relative to incomes, which is particularly challenging for entry-level buyers."
The 30-year fixed mortgage rate has decreased to 3.82% from a peak of about 4.94% in November, according to data from mortgage finance agency Freddie Mac. According to the latest data, house prices rose 3.7% in March from a year ago, outpacing wages, which increased 3.1% in May.
Mortgage rates have dropped in recent weeks on expectations that an escalation in the trade war between Washington and Beijing could prompt the Federal Reserve to cut interest rates this year to offset the impact of the tariffs on the economy.
Fed officials were due to start a two-day policy meeting on Tuesday. A rate cut is not expected when they conclude their meeting on Wednesday.
President Donald Trump in early May imposed additional tariffs of up to 25% on $200 billion of Chinese goods, prompting retaliation by Beijing. Trump has threatened more duties on Chinese imports if no deal is reached.
Permits to build single-family homes increased 3.7% to a rate of 815,000 units in May, after five straight monthly declines. Single-family housing permits fell in the Northeast, West and Midwest. But single-family building permits in the South increased by the most since December 2016.
Starts for the volatile multi-family housing segment surged 10.9% to a rate of 449,000 units last month. Permits for the construction of multi-family homes dropped 5.0% to a pace of 479,000 units last month.
Housing completions fell 9.5% percent to 1.213 million last month and the inventory of homes under construction was unchanged.