New home construction in the US slumped in May to the slowest pace in four years, as higher-for-longer interest rates sap the housing industry’s momentum from earlier this year.

Housing starts decreased 5.5% to a 1.28 million annualized rate last month, according to government data released Thursday. The figure was below all but one estimate in a Bloomberg survey of economists.

Building permits, which point to future construction, fell 3.8% to a 1.39 annual rate, also the weakest since June 2020. The declines in starts and permits were broad across multifamily and single-family units. Authorized permits for single-family homes dropped for a fourth straight month to the slowest pace in a year.

The drop in homebuilding suggests residential construction may detract from economic growth after stabilizing earlier this year. Before the report, the Federal Reserve Bank of Atlanta’s GDPNow forecast suggested the category would be roughly flat in the current quarter.

Recent data indicating cooling inflation as well as consumer spending should give the Fed greater confidence to start cutting interest rates, which will lower mortgage rates, too. Even so, the US still faces a huge housing shortage, which is keeping prices elevated and locking many Americans out of homeownership.

Major homebuilders including Lennar Corp. and KB Home have been trying to offset high rates with generous sales incentives, which has helped boost demand. Even so, the companies have been able to maintain healthy margins, which executives say can go up further when a lower-rate environment allows them to reduce concessions.

Construction declined in three regions, led by a 19% slump in the Midwest. While building activity picked up in the West, the pace is still slower than what was seen for much of last year.

Home completions fell as well. The number of multifamily projects already under construction dropped to the lowest since September 2022, while those of one-family units were the weakest this year.

The housing starts data are volatile, and the government report showed 90% confidence that the monthly change ranged from a 3.9% decline to a 14.9% gain.

This article was provided by Bloomberg News.