Building permits, which measures new housing units granted permits that have not necessarily begun construction yet, rose 5.2% in May, following a 1.5% drop in April.
April housing starts were revised down to 1.34 million from 1.4 million, suggesting that May's "big outlier" may not tell the full story, Adams said.
In an effort to combat surging inflation, the Federal Reserve consecutively raised interest rates over the past 15 months. This pushed mortgage rates up significantly — topping 7% last November — leading to a slowdown in new and existing home sales. However, as the Fed adjusts its monetary policy and pauses its rate hikes, mortgage rates are trending lower and more homebuyers are returning to the market.
Builders eager to capitalize on reignited demand and low levels of supply are now building more homes.
"Builders are feeling cautiously optimistic about market conditions given low levels of existing home inventory and ongoing gradual improvements for supply chains," Alicia Huey, chairman of the National Association of homebuilders, wrote in a housing report.
As the demand for new home construction grew in May, homebuilder confidence rose for a 6th consecutive month in June, according to the National Association of Home Builders and Wells Fargo. June's reading marks the first time since 2022 that both the current and future sales components of the firm's index exceeded 60.
"A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year," Robert Dietz, the chief economist at NAHB said in a statement, adding that improved economic conditions will also bode well for builders.
"The Federal Reserve nearing the end of its tightening cycle is also good news for future market conditions in terms of mortgage rates and the cost of financing for builder and developer loans," Dietz said.
To be sure, the bulk of the house buying market comes from existing homes rather than newly built homes.
The initial housing starts report "is really important for housing's contribution to GDP, but it only covers a sliver of the housing market as far as home buyers are concerned," Adams said. "In a typical year, five out of every six home purchases are on existing homes, and that side of the residential market is considerably weaker than the newly built market."
However, despite improvements in the homebuilding sector, it's really the nation's homebuyers who are coming out on top.
According to data from the NAHB, builders offered incentives such as price discounts and free upgrades to buyers at a rate of 56% in June, up from 54% in May. Additionally, 25% of builders reduced home prices to boost sales during the month with an average price reduction of 7%.
