Construction hits a roadblock amid rising rates
US housing starts lost momentum in March, falling 14.7% to a seasonally adjusted annual rate of 1.32 million units, according to the latest government data.
The slowdown, steeper than consensus expectations of 1.49 million units, was particularly severe within the multifamily segment, where starts plummeted 20.8% to 290,000 in March. Single-family starts also fell, decreasing by 12.4% to a rate of 1.02 million.
“While elevated mortgage rates continue to throw a wrench into housing markets and expectations of housing starts, home builders remain optimistic and will continue to add more single-family homes over the course of the year,” said CoreLogic chief economist Selma Hepp. “In addition, with the continued imbalance between supply and demand, home prices are expected to keep rising. However, with expectations of Federal Reserve rate cuts fading out of forecasts, potential homebuyers will not gain any cost advantage by staying on the sidelines in 2024.”
First American deputy chief economist Odeta Kushi offered a broad perspective on the data.
“Single-family groundbreaking is still up 21% compared with a year ago and is more than 20% above the five-year pre-pandemic average,” Kushi said. “On the multifamily front, the number of apartments under construction nationwide peaked last summer but is still near an all-time peak, with 940,000 currently being built.
“Many of these apartments are coming to market now. As a result, we can expect the surge in new apartment supply to continue throughout this year and into the first half of 2025.”
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While renters will have more choices this year, the future supply pipeline of multifamily construction is falling, raising concerns about future housing shortages. Estimates suggest the US is currently undersupplied by approximately three million housing units.
“Currently, there are approximately 1.65 million units of housing under construction (apartments and homes),” Kushi said. “Even if all those units came to market tomorrow ready to sell or lease, we’d still likely have a housing shortage.”
“Builders are grappling on several fronts as the inflation fight continues,” added Carl Harris, chairman of the National Association of Home Builders (NAHB). “Higher interest rates are increasing the cost of housing for prospective home buyers and raising the development and construction cost for builders of homes and apartments. At the same time, shelter inflation is rising faster than overall prices due to supply-side challenges.”
Permit issuance has also reflected the downturn, with overall permits dropping 4.3% to a 1.46 million unit annualized rate in March. Single-family permits fell by 5.7% to 973,000 units, while multifamily permits decreased slightly by 1.2% to 485,000 units.
Despite these challenges, sentiment among builders remains cautiously optimistic.
“Builder sentiment was flat in April but remains above the break-even point of 50, indicating positive sentiment,” Kushi pointed out. “The long-term housing shortage, coupled with a lack of existing-home inventory and builders’ ability to offer incentives, has helped to buoy new single-family construction.”
Despite the challenges, industry experts believe the new-home market will continue to outperform the existing-home segment in the near term, as builders can offer incentives that locked-in existing homeowners cannot.
“We believe this is a temporary slowing, given strong underlying demand for housing and buyers’ limited options on the resale market,” added Gregg Logan, managing director at RCLCO Real Estate Consulting.
“Homebuilders’ willingness to utilize incentives such as price reductions, mortgage rate buy-downs and paying buyers closings costs will support the pace of new home starts over the balance of the year, and so we expect starts to trend upward.
“The Fed’s expected rate cuts and lower inflation numbers had been predicted to lead to gradually lower mortgage rates at this point, but strong job growth numbers have led the Fed to delay cutting the Fed Funds rate.”
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