Construction of new houses in the United States slowed in April as builders’ sentiment soured on the spike in mortgage rates. Builders, expecting faster interest rate increases from the Federal Reverse to tackle inflation, are slowing down their plans for new supply.

With demand cooling off, we should expect new residential starts to fall back to the pre-pandemic trend rather quickly.

Housing starts fell by 0.2% on the month to 1.724 million annualized, according to the U.S. Census Bureau. March’s reading was revised downwardly from a 0.2% gain to a significant decrease of 2.8%. The decline in housing starts came from the single-family component, which fell by 7.3% on the month, while multi-family dwellings rose by a sharp 15.3%.

That did not take away from the underlying trend based on the six-month moving average—a much less volatile series—that showed housing starts at a fresh 16-year high in April. Elevated prices and robust demand in the past couple of months had incentivized developers to build more homes.

But mortgage rates, which had fueled such demand by staying historically low, are now rising rapidly. After surpassing 5% in April, the 30-year mortgage rate continued to rise higher, reaching 5.3% for the week ending May 13, according to data from Freddie Mac.

That caused builders’ sentiment to drop to the lowest level since June 2020, according to recent data from the National Association of Home Builders.

Building permits—a proxy for future starts—told the same story in April, falling by 3.2% on the month. Most permits become new housing starts within two months. Permits for both single-family and multi-family houses dropped in April.

Underneath the headline, April’s homes under construction rose steadily, by 1.6%, while completions dropped by 5.1%.