Construction of new homes in the U.S. jumped in May, a result of strong demand from buyers of single-family homes. Housing starts rose by 21.7% to a 1.63 million seasonally adjusted annual rate, surpassing economists' expectations. This marks the second consecutive month of growth and the highest construction pace since April of last year.

The Midwest saw the biggest leap in construction activity, where housing starts rose by 67% from the prior month. Yet across the country, both single-family and multi-family construction saw strong increases in May. Building permits, which indicate future construction activity, also rose 5.2% to a 1.49 million rate. As the weather improves, the pace of construction is picking up considerably as well.

This surge in new construction comes as a bright spot in an otherwise challenging housing market. Limited options and higher mortgage rates in the resale market are driving demand toward new homes. Homebuilders have even scaled back sales incentives, such as price cuts, due to the strong demand. Builders are also showing increased optimism about the housing market, marking the first time in nearly a year that they have felt positive about the industry's outlook.

While the unexpected surge in residential construction caught some experts off guard, it highlights the volatility and unpredictability of housing starts data. Nevertheless, the housing sector appears to be recovering quickly after facing significant affordability challenges last year when mortgage rates more than doubled.

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