The U.S. government said Wednesday that the annual rate of housing starts fell to 1.43 million last month from 1.56 million in May. The data measures how many homes would be built for the year if starts were the same each month as they were in June.

June's starts slowed from the previous month's nearly 16 percent increase. This year's May housing starts are second only to the March 2021 rate.

Wall Street economists were expecting an even bigger drop, at 9.2 percent. All data are seasonally adjusted. The last time housing starts fell this much was in July 2022.

Construction of both single-family and multifamily homes fell in June as homebuilders scaled back new construction to focus on organizing and selling existing inventory.

However, strong interest from potential homebuyers is creating strong demand for new homes. These homebuyers continue to lack options in the existing home resale market.

A 33 percent drop in housing starts in the Midwest this summer was the primary reason for the decline in construction.

As a sign of future construction, building permits fell 3.7 percent to 1.44 million.

KEY DETAILS The pace of construction of single-family homes fell 7 percent in June, and apartment construction was down 11.6 percent.

Homebuilders in the Midwest pulled back the most, with housing starts down 33 percent. This followed a 67% surge in housing starts in the Midwest in May.

The only region in the U.S. to see an increase in housing starts in June was the West, where single-family starts rose 4.6%.

Permits for single-family homes rose 2.2 percent in June, while building permits for homes with at least five or more units fell 13.5 percent.

The big picture: Builders accelerated construction of single-family homes in late spring as the weather warmed up. Housing starts jumped nearly 16 percent in June, government data show.

But they're not pulling back this summer because of weak demand. They seem to be focusing on completing these projects. As of June, 1.68 million homes were under construction, the highest level since February.

The National Association of Home Builders reported Tuesday that demand for new homes continues to be strong, and builders continue to reduce sales incentives such as price cuts.

What they're saying. Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets, wrote in a report that single-family housing starts were strong in May and June.

Given that construction of single-family homes remained at high levels this spring and summer, he added, "this is further evidence that housing activity is at least bottoming out after a rough second half of 2022.

"Overall, the cooling of construction and permitting is a good sign for the Federal Reserve as it looks to limit housing market activity in order to keep inflation in check," Katherine Judge of CIBC Economics wrote in a note.

MARKET REACTION: U.S. stocks opened higher in early trading Wednesday. the yield on the 10-year Treasury note fell below 3.75%.