The numbers: Construction of new homes fell 14.7% in March, as home builders scaled back new projects.

The pace of construction slowed as builders contended with higher mortgage rates sapping demand.

Housing starts fell to a 1.32 million annual pace from 1.55 million in February, the government said Tuesday.

That’s how many houses would be built over an entire year if construction took place at the same rate in every month as it did in March.

The drop in March was the sharpest since April 2020, when starts dropped by 27%.

Outside of the pandemic, housing starts fell by the most since February 2015.

To be sure, new construction has been trending lower in recent months. Housing starts fell in March to the lowest level since August 2023.

The data fell more than what Wall Street expected, which was 1.48 million. All numbers are seasonally adjusted.

Single-family and multi-family construction both fell sharply in March.

But in a more recent survey of builders in January, builders were relatively still upbeat about future sales of new homes, and are optimistic about demand as they expect rates to fall through the rest of the year.

Building permits, a sign of future construction, also fell 4.3% to a 1.46 million rate.

Key details: Builders scaled back constructing new single-family homes, leading to a 12.4% drop, as well as apartment starts, which fell 20.8%.

New construction fell across most of the nation, with the biggest drops in the Northeast. The West was the only region which saw new construction increase in March.

Permits for single-family homes fell 5.7% in March, while apartment permits were flat.

Big picture: Housing starts are generally a volatile data series, but the data shows that builders still see demand for new housing is significantly impacted by the swings in mortgage rates.

With mortgage rates beginning their ascent in February, home buyers may have pulled back from purchasing homes, which would explain the big drop in housing starts in March.

Overall, the drop in new-home construction is a setback for the housing market, which is already facing a housing deficit due to demand outpacing supply. The NAHB estimates that the country is short of roughly 1.5 million housing units.

What are they saying? “The pace of U.S. homebuilding pulled back sharply in March [is] likely reflecting the recent pickup in mortgage rates,” Ali Jaffery at CIBC Economics wrote in a note.

“Restrictive monetary policy has depressed housing activity materially over the tightening cycle,” he added, and that starts are likely to remain around the 1.4 million pace until the Fed eases.

The “March data is indicating a loss of momentum for single-family construction,” First American’s Odeta Kushi tweeted. “But perspective is important: single-family groundbreaking is still up 21% compared to a year ago, and more than 20% higher compared to the 5-year pre-pandemic average.”

Looking ahead: One builder told MarketWatch that they still see strong demand from home buyers, and hence are keeping a “firm pace” of new construction in the first quarter of 2024.

With the U.S. being short of over a million homes, “we are working to close the gap, but I don’t think we’re catching up to the shortfall in housing just yet,” Rob Bowman, founder of Pennsylvania-based Charter Homes & Neighborhoods, said.

Aside from pain points such as the cost to get approvals and develop lots that the builder is facing, “homebuyer costs like mortgage rates, insurance, and real estate taxes are adding to the headwinds,” Bowman noted.