A report from the U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau indicates that single-family starts rose to an 11-month high in May. In reporting on the change, the National Association of Homebuilders (NAHB) attributes an increase to limited existing inventory combined with solid demand and improving supply chains.

According to the report, the overall housing starts in May increased 21.7% to a seasonally adjusted annual rate of 1.63 million units.

The May reading of 1.63 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts increased 18.5% to a seasonally adjusted annual rate of 997,000. The number is still 6.6% lower than a year ago. The multifamily sector, which includes apartment buildings and condos, increased 27.1% to an annualized pace of 634,000.

“Mirroring rising builder sentiment, single-family permits and starts increased in May as builders boosted production to meet unmet demand,” said Alicia Huey, NHAB chairperson and custom home builder and developer from Birmingham, Ala. “Despite elevated interest rates that make the cost of housing more expensive, the lack of existing home inventory in most markets is leading to increased demand for new construction.”

While single-family starts are down 24% year-to-date, single-family completions are down just 1.2% as projects started at the end of last year now enter completion. Of note, the May housing data shows that the number of single-family homes under construction is down 16% compared to a year ago at 695,000, while the number of apartments under construction is up 17% to 994,000—the highest level since September 1974.

“The May housing starts data and our latest builder confidence survey both point to a bottom forming for single-family residential construction earlier this year,” said NAHB chief economist Robert Dietz. “There have been some improvements to the supply-chain, although challenges persist for items like electrical transformers and lot availability. However, due to weakness at the start of the year, single-family housing starts are still down 24% on a year-to-date basis.”

Dietz also noted that the May housing data signals a positive development on the inflation front.

“A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year,” he said. “This month marks the first time in a year that both the current and future sales components of the Housing Market Index have exceeded 60, as some buyers adjust to a new normal in terms of interest rates. 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 further noted the Fed and Washington policymakers must factor into consideration how the state of home building is critical for the inflation outlook and the future of monetary policy.

“Shelter cost growth is now the leading source of inflation, and such costs can only be tamed by building more affordable, attainable housing – for-sale, for-rent, multifamily and single-family,” he said. “By addressing supply chain issues, the skilled labor shortage, and reducing or eliminating inefficient regulatory policies such as exclusionary zoning, policymakers can play an important and much-needed role in the fight against inflation.”