U.S. single-family homebuilding and permits tumbled in March as soaring mortgage rates increased costs, but residential construction remains underpinned by a severe shortage of houses.

The report from the Commerce Department on Tuesday also showed a record backlog of homes approved for construction, but yet to be started. It followed on the heels of news on Monday that sentiment among single-family homebuilders dropped to a seven-month low in April.

The 30-year fixed mortgage rate has risen to 5% for the first time in over a decade as the Federal Reserve hikes borrowing costs to quell sky-high inflation. The housing market is the sector of the economy most sensitive to interest rates.

“A lack of existing inventories should be positive for building activity,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York.

“However, high input costs and shortages, of both labor and materials, remain headwinds for builders. Rising mortgage rates that crimp demand will also be a consideration for building activity going forward.”

Single-family housing starts, which account for the biggest share of homebuilding, dropped 1.7% to a seasonally adjusted annual rate of 1.200 million units in March. Single-family homebuilding plummeted in the Northeast. It also fell in the West and densely populated South, but rose in the Midwest.

Starts for housing projects with five units or more jumped 7.5% to a rate of 574,000 units, the highest since January 2020.

There is strong demand for rental accommodation, with the economy fully reopened following disruptions earlier in the COVID-19 pandemic. Rents increased by the most in 20 years on an annual basis in March, while the rental vacancy rate in the fourth quarter was the lowest since mid-1984. 

The surge in the volatile multi-family segment helped to lift overall housing starts 0.3% to a seasonally adjusted annual rate of 1.793 million units, the highest since June 2006.

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