Housing starts and permits inched up in March due to a boost from multifamily homes, beating market forecasts for significant declines in both series.

New residential starts rose 0.3% on the month to a 1.79 million annualized rate, the highest since 2006. Building permits, an indicator of future starts, climbed 0.4% to an annualized 1.87 million.

With backlogs remaining high, we should expect housing supply to stay above the pre-pandemic level of the 1.5 million annualized rate in the coming months. That said, rapidly rising mortgage rates as a result of the Federal Reserve’s plan for multiple 50-basis-point rate hikes starting in May and declining demand due to elevated prices will certainly slow supply.

The early sign for such a slowdown showed up in the March report as starts and permits for single family homes—which account for about 60% of the total monthly housing supply—fell sharply, by 1.7% and 4.8%, respectively.

Falling demand and rising supply in recent months suggest that the housing imbalance is shrinking, yet it does not mean that the housing shortage issue is going away any time soon as millions of Americans have been pushed out due to unaffordable prices.

Beneath the headline, the number of houses under construction rose steadily at 2.3% in March while the number of completions dropped 4.5%. Permits that have not yet been started increased by 2.9% on the month.

The takeaway

The Fed’s unanticipated impact on spurring the housing market, which was depressed for about 10 years because of the Great Financial Crisis, will likely end this year as interest rates are being brought back to neutral.

Last week saw the mortgage rate hit 5% for the first time since 2011, according to data from Freddie Mac.

With millions of homes short, the government will need to step in more quickly to alleviate the spillover effect on the shelter component of inflation, which has seen housing and rental prices soaring persistently.