Homebuilders are slowing down construction, and it could make it even harder for first-time buyers in the years ahead

• Rising construction costs have led to a slowdown in the real estate market.
• US housing starts fell 6.3% to an annual rate of 1.56 million units in June, the Census Bureau said.

Inflation and interest rate hikes have not only priced out many would-be home buyers — they have also pushed out home builders grappling with rising material costs.

As construction levels slow, it could become more difficult to find affordable homes.

Data from the Commerce Department shows that US housing starts, or the number of new homes that began construction in the month, declined to a seasonally adjusted annual rate of 1.56 million units in June. Falling below consensus expectations of 1.57 million, the drop is attributed to inflationary pressure that has increased the cost of mortgage rates and weakened consumer sentiment. Starts are now running at the slowest pace since September 2021.

While apartment construction held strong in the month, single-family homes fell off dramatically. Although multifamily construction — units in buildings with five households or more — increased by 10.3%, single family construction fell 8.1% from May to the lowest reading since June 2020. The category saw annual construction fall to a pace of just under 1 million, well below the revised May figure.

"While the multifamily market remains strong on solid rental housing demand, the softening of single-family construction data should send a strong signal to the Federal Reserve that tighter financial conditions are producing a housing downturn," Robert Dietz, the chief economist at the National Association of Homebuilders, told Insider.

Record high inflation has pushed construction costs to new highs. Data from NAHB shows that building material prices are up 20.4% since 2021 and 31.3% since January 2020. This has added as much as $14,000 to the construction costs of the average newly built single-family home. As costs weigh on builders – and homebuyers burdened by rising mortgage rates as the Fed attempts to curb inflation — it's led to a slow down in construction that has limited the supply of affordable homes — especially for the nation's first-time homebuyers

Meanwhile, the Fed's efforts to combat skyrocketing prices are crimping demand, as interest rate hikes lead to ever-more unaffordable mortgages. "As interest rates go up, the impact on demand is strongest for those younger, less wealthy, prospective first time buyers." Dietz said. "They are the part of the market that's been the most challenged due to a lack of resale or existing inventory."

There are not enough affordable homes for first-time buyers

First-time home buyers — largely millennials — are having a rough time in the real estate market. That's because home builders are not building enough affordable homes for them to purchase. Of the nearly 72 million millennials who make up more than a third of U.S. potential buyers, data shows there were only 300,000 starter homes available to them in September.

Starter homes are typically smaller, more affordable entry-level homes that are purchased by cash-strapped or new home buyers. They were once viewed as a precursor to a forever-home purchase, but have been disappearing as builders focus on more lucrative projects — and buyers compete for dwindling housing stock.

"Starter homes have been the hardest to build because of structural issues like the labor shortage, higher material costs and also regulatory issues like zoning rule," Dietz said. "Given the lack of existing home inventory, the difficulty building affordable entry-level homes will limit homeownership access for younger households."

As these factors impact the housing market, data from NAHB shows that the share of adults planning to purchase a home within a year has fallen for the third consecutive quarter to 13%. The decline is due to first-time home buyers "taking a step back from the market" as their share among all prospective buyers has been on the decline for two consecutive quarters — from 65% in Q3 of 2021 to 60% in Q1 of 2022 — to near pre-pandemic levels.

With the national median listing price sitting at an all-time high of $450,000 and monthly mortgage payments more than $400 higher than they were in 2021, it's no surprise many would-be first-time buyers are pausing their pursuit of homeownership. If new and affordable inventory is not introduced to the market, it could mean even more of this demographic will have a harder time making their homeownership dreams a reality.