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June 16, 2022 2:55 PM, EDT

Record Homes Under Construction Raise Hope of Inventory Boost

Contractors work on a home under construction in Antioch, Calif.Contractors work on a home under construction in Antioch, Calif. (David Paul Morris/Bloomberg News)

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U.S. housing starts may have fallen to more than a one-year low in May, but a historic pipeline of homes under construction is seen easing an inventory crunch as those projects come to fruition.

The number of homes under construction rose to 1.67 million units last month, the highest in government data back to 1969. Moreover, housing completions rose more than 9% from the prior month to the highest level since 2007.

Builders over much of the past two years have been caught between robust buyer demand on one side — turbocharged by ultra-low mortgage rates — and unprecedented supply constraints on the other. Those pressures that limited inventory are showing signs of easing as a recent surge in borrowing costs slows sales, enabling firms to make headway on swollen backlogs.

While completions continue to lag the number of units under construction, the uptick is a silver lining after an otherwise disappointing housing starts print.

And yet, rising mortgage rates and softening housing demand are casting a shadow over homebuilding stocks, which fell for a fifth consecutive day and are on pace for their worst start to the year on record.

The S&P Supercomposite Homebuilders Index dropped 7.5% for its worst day since June 2020, as investor woes deepened with mortgage rates jumping by the most since 1987 and housing starts dropping more than expected last month. Tri Pointe Homes Inc., Century Communities Inc. and Taylor Morrison Home Corp. were among the biggest decliners, falling more than 10% each. 

“Builders may be tapping the brakes given slowing buyer traffic and the view that prices need to correct in the hottest markets,” said Citigroup Inc. analyst Anthony Pettinari. As the Federal Reserve pursues more hawkish measures after June 15's 75-basis point hike, discounting and outright price reductions on houses may become more commonplace, he added in a report released June 16.

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