Implications: Homebuilding was abysmal in May with housing starts dropping 15.4%, coming in well short of even the most pessimistic forecast for any Economics group surveyed by Bloomberg.  The 1.177 million annual rate in May is the slowest pace outside of the COVID shutdown months since 2019, but does this mean we are on the precipice of another housing bust? Not likely.  Housing starts are notoriously volatile from month to month, and occasional wild swings in the data are not uncommon. The bulk of the weakness in May came from the multifamily sector, where starts plunged 40.2%, the third largest decline on record dating back to 1959. By contrast, single-family starts declined just 1.9% and remain close to where they began the year.  Permits for new builds ticked 0.7% lower to a 1.413 million annualized rate, slightly below expectations. However, single-family permits rose 0.6%, suggesting little change in the underlying trend.  Home completions fell 8.1% in May to a 1.313 million annual rate, though the decline was once again concentrated in the multifamily sector, where completions dropped 18.8%. By comparison, single-family completions declined 1.6%.  Completions have outpaced starts for much of the last year, pushing the total number of homes under construction 7.1% lower in the past twelve months.  In the early 1990s and mid-2000s, this type of decline was associated with a housing bust and falling home prices.  But with the brief exception of COVID, the US has consistently started too few homes almost every year since 2007. So, while multiple headwinds may hold back housing starts, a lack of construction since the last housing bust should keep national average home prices elevated.  However, none of this changes the fact that homebuilders continue to face a very challenging environment. Affordability remains the key issue, with 30-year mortgage rates reversing a recent decline and climbing back roughly 50 bps to 6.6% since the onset of the war in Iran, roughly double the levels that prevailed through much of 2021.  Hopefully, mortgage rates will now decline as a result of the recent peace agreement.  High home prices, restrictive local building regulations, tighter immigration enforcement making it difficult to find or replace workers, and tariffs are also contributing.  Given these headwinds, it is no surprise to see the NAHB index (a measure of homebuilding sentiment) dropping to 35 in June from 37 in May, where a reading below 50 signals that a greater number of builders view conditions as poor versus good (now the 26th consecutive month that has been the case.)  In other news this morning, import prices increased 1.9% in May while export prices rose 1.3%.  In the past year, import prices are up 6.7%, while export prices have risen 11.2%.  Expect a reversal soon as oil prices have dropped due to the agreement with Iran.

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