US new residential construction starts jumped by 19% in June compared to the previous month, but the strong performance was entirely driven by volatile apartment projects, while starts and permits for single-family homes continued their weak trend. This highlights that high interest rates, elevated inventory, and uncertainty from Middle East conflicts are persistently weighing on residential investment.

Data released on Friday showed that new housing starts in June increased at a seasonally adjusted annual rate of 19.0% to 1.427 million units, reaching a three-month high and significantly exceeding market expectations. However, this rebound was almost entirely fueled by multifamily housing: starts for apartment buildings with five or more units soared by 76.3% to an annualized rate of 513,000 units, following a nearly 40% plunge in the previous month. This fully reflects the high monthly volatility characteristic of multifamily housing data. Simultaneously, high home prices and elevated mortgage rates are pushing some homebuying demand toward the rental market, providing support for apartment construction.

In stark contrast, starts for single-family homes, which constitute the bulk of residential investment, edged down 0.2% to an annualized rate of 895,000 units. This represents a 3.2% decline from a year ago, marking another downturn after a generally sluggish spring season. Builders of single-family homes continue to face dual pressures from high inventories of unsold new homes, nearing levels seen in late 2007, and soft demand, compelling them to broadly increase sales incentives.

A survey by the National Association of Home Builders indicated that builder confidence for single-family homes remained low in July. The industry attributed this to economic uncertainty stemming from Middle East conflicts, rising material and land costs, and persistently high mortgage rates.

Forward-looking indicators point to further cooling. Overall building permits in June fell by 3.0% to an annualized rate of 1.367 million units, the lowest level since March. Within this, permits for single-family homes decreased by 2.4% to 871,000 units, hitting a ten-month low and down 0.2% year-over-year. Permits for multifamily units also declined by 4.9% to 445,000 units. As a leading indicator for future construction, the broad decline in permit data suggests that subsequent building activity may cool down again.

Analysis indicates that persistently high mortgage rates continue to suppress purchasing power. According to Freddie Mac data, the average rate on a 30-year fixed mortgage has climbed nearly 60 basis points since the joint US-Israel strike on Iran in late February, reaching an 11-month high of 6.55% this week. Against this backdrop, the Atlanta Fed's GDPNow model previously projected that residential investment would contribute very little to second-quarter GDP growth.

Regionally, new housing starts increased across most major areas in June. Starts in the South, the nation's largest homebuilding region, rose by 15.2%, primarily driven by multifamily projects. The Midwest saw starts climb to their highest level so far in 2024.

On the policy front, industry research analyst Drew Reading noted in a briefing this week that the recently passed "21st Century Housing Pathways Act" (bipartisan housing affordability legislation) is viewed as a long-term positive. It is seen as particularly beneficial for build-to-rent communities and manufactured housing developers, and includes provisions to limit large-scale acquisitions of single-family homes by investment firms and to expedite or exempt environmental reviews for certain projects. However, the analyst believes that, as the implementation of related provisions will take time, the legislation is unlikely to provide substantial near-term relief for the industry's challenges.

It is noteworthy that the bill automatically became law without President Trump's signature, as he had requested Congress to pass a separate voting bill first. The government report also noted that monthly housing starts data are highly volatile. The June change has a 90% confidence interval ranging from an increase of 3.1% to 34.9%, indicating a significant possibility of future revisions.