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High mortgage rates are finally hitting new home construction as builders are pulling back on projects

Getty Images—AzmanL

The housing crisis in America is multifaceted. Prospective home buyers are reluctant to buy, given sky-high mortgage rates and home prices—and for the same reason, current homeowners have shied away from selling. But there’s also a massive housing crunch; the U.S. is short 3 million to 6 million homes.

And to make matters worse, there’s been a slowdown in both single-family and multifamily housing construction, according to U.S. Census Bureau data issued Tuesday. Indeed, single-family starts fell in March because “builders are beginning to anticipate that mortgage rates will likely remain elevated for much longer than previously thought,” according to Zillow. As of Wednesday, the average 30-year fixed mortgage rate was at a five-month high of 7.43%. This is the biggest one-month drop in new home construction since April 2021, according to U.S. Census Bureau data.

Builders’ hands are tied

A number of factors have contributed to slowing new construction numbers, industry experts agree. And it doesn’t all have to do with consumers—there are several market factors that have forced builders to pump the brakes on new builds.

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“While we are experiencing a housing supply shortage, the fact is that with high mortgage rates and an uncertain job market, many that want to purchase homes simply can't do so,” Ryan Hoover, CEO of Ceed Civil Engineering, which specializes in new-home construction, tells Fortune. “So from a builder's perspective, it makes little economic sense to ramp up construction on homes that won't be sold in the near future.” What’s more, materials costs are rising again, and the lumber tax is expected to go up this summer, he says.

It’s also more difficult for builders to find more affordable financing options for new builds, Kori Sassower, a team head and real estate agent with Compass who focuses on new construction, tells Fortune. And there’s less land available to buy for new construction than in recent years, which is prompting more builders to buy and tear down existing homes, she adds.

“Ultimately, builders aren’t holding back because they don’t believe the demand is there,” Sassower says. “The issue is that they don’t have enough supply and financing is making building prohibitive.”

A closer look at the numbers

Single-family housing starts are slowing, but they’re still 21.2% higher than last year’s pace, according to Zillow. Multifamily builds are faring worse: Construction on buildings with at least five units decreased by 20.7% in March and 43.7% from the previous year, Zillow’s analysis shows.

Falling construction numbers will have both long- and short-term effects on the housing market. In the immediate term, lower construction numbers mean lower inventory levels—preventing the drop in home prices that buyers are clamoring for. Since the start of the pandemic, home prices have skyrocketed, which makes it exceedingly difficult for new buyers to break into the market. Indeed, the stock of existing homes available for sale remains 36% below pre-pandemic levels, and home values increased faster this month when compared to March 2023, according to Zillow.

Slowing construction will also impact local labor markets as fewer projects get started, Ryan Reich, real estate developer and chief investment officer of Mountain Shore Properties, tells Fortune. In other words, fewer new projects mean fewer construction jobs.

“Longer-term, when demand finally does pick up—from lower interest rates or the slow rollover of existing mortgages to higher-rated mortgages—it will put upward pressure on prices as it takes several years for housing supply to come online to meet demand,” Reich says.

To combat high mortgage rates and home prices, builders have sweetened incentives to entice prospective buyers to actually make a move.

“‘Incentive’ is just a big fancy word for discount, and what we’re seeing on that front is that it’s what’s creating a competitive advantage for the new-home market,” Devyn Bachman, senior vice president of research with John Burns Research and Consulting, previously told Fortune. The mortgage-rate buydown, the industry term for discounted mortgage rates, is the most “desired and most effective” incentive offered in the new-home market today, she said.

What’s more, 22% of builders cut their prices this month, according to Zillow, further sweetening the pot for buyers. The average price cut is 6%. But for some buyers, that’s still not enough.

“Long-term, there will be a shift to alternative housing solutions,” Hoover says. One thing his firm has seen is an increase in requests to design shipping container homes, “which indicates to me that buyers are looking for alternatives to the traditional housing market.”

This story was originally featured on Fortune.com