New zoning laws won’t help housing starts grow

Today’s housing starts were an epic miss relative to estimates, which most likely means they will be revised slightly higher later. Housing permit data was just ok, but the report shows that in 2026, the law of supply and demand is still more relevant than better zoning laws when it comes to housing construction.

Some people believe that if zoning laws improve, angels will fall from the sky and we are going to build a lot more homes — even while new home sales go nowhere and the oversupply of completed units stands at 122,000 today. That number is important: Traditionally, going back decades, builders don’t want to build more homes when this data line exceeds 120,000.

To illustrate this point, here is the January of every year going back decades.

We simply have too much supply of housing units to grow housing construction, as new home sales have just been stuck in a range for many years.

Lets take a look at the report to see what just happened.

From Census: Housing Starts: Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,177,000. This is 15.4 percent (±9.8 percent) below the revised April estimate of 1,392,000 and is 8.7 percent (±8.2 percent) below the May 2025 rate of 1,289,000. Single-family housing starts in May were at a rate of 882,000; this is 1.9 percent (±10.8 percent)* below the revised April figure of 899,000. The May rate for units in buildings with five units or more was 284,000.

As you can see below, we just don’t have new home sales growth, and there’s too much supply for all these data lines to reverse and head higher. While the builders have done an admirable job of keeping demand from falling even more, it has come at the cost of profit margins, which means their confidence to really push permits higher just isn’t there.

As you can clearly see in the homebuilders’ confidence index, everything is fading, not growing; this isn’t the environment where zoning laws can overcome supply and demand economics.

The multifamily construction boom that we enjoyed during COVID has come and faded out, and that’s not a shock, as rental vacancy data has grown from the COVID lows to 7.3%.

This level of rental vacancy keeps rents from growing much, and in some parts of the country, we have rental deflation. That’s not good news if you’re trying to pencil out if it would be profitable to build.

In the past, the government gave builders financial incentives to increase multifamily construction, and they worked well; once those incentives ended, construction faded. The loan programs of the late 1960s and tax benefits of the early 1980s helped 5-unit construction a lot. We might need to think like that again, if we are serious about growing construction.

Back in June of 2021, I warned that once rates rise, you can kiss this construction boom goodbye and now, in 2026, we can see how housing construction has faded ever since.

Conclusion

I do believe this housing starts report will get revised slightly higher, as often happens with Census reports when you have a big beat or miss with new home sales or housing starts. However, the story stays the same: the builders aren’t the March of Dimes. We have too much supply of single-family completed units of sale and 5-unit construction to see growth in housing construction data, and better zoning laws won’t help this.