US housing starts plunge

Construction of new homes in the US dropped in January as buyers continued to sit on the sidelines in anticipation of lower mortgage rates down the line.

Government data released Friday showed residential starts slid by 14.8% last month, hitting an annualized rate of 1.3 million, while multifamily home construction was down more than 35% – reversing a sharp December uptick.

That marked a slower pace than analysts had expected, with a Bloomberg survey of economists indicating a median estimated pace of 1.46 million total starts.

National Association of Realtors (NAR) chief economist Lawrence Yun said housing starts had “collapsed” in January, with seasonally adjusted data suggesting no end in sight to the current inventory shortage.

He said developers were pulling back, if only temporarily, from the multifamily construction space due to rising apartment vacancy as a result of the oversupply of construction in recent years.

The US “greatly underproduced” housing in the decade prior to the outbreak of the COVID-19 pandemic, according to Yun, with that shortage still reverberating around the marketplace.

“The way to address the shortage is to incentivize construction,” he said. “However, some localities are choosing the wrong policies, such as rent control, NIMBYism, and raising impact fees, which will make the shortage worse and raise housing costs in the long run.”

Single-family starts tick upwards on yearly basis

Still, there was some room for optimism with single-family housing starts jumping by 22% on a year-over-year basis despite slipping by 4.7% compared with December.

Those starts hit a clip of 1.004 million in January, the first time they’ve exceeded the one-million mark for three consecutive months since the middle of 2022.

Meanwhile, single-family permits, which are a strong indicator of future starts, hit their highest level since May of that year – a trend First American deputy chief economist Odeta Kushi said was consistent with a recent improvement in homebuilder sentiment.

“The uptick in single-family permits suggests cautious optimism on the part of builders, and suggests that the single-family market is poised for growth,” Kushi said.

“The improvement in builder sentiment has been driven by the gradual decline in mortgage rates since the fall of last year. Additionally, builders continue to benefit from a lack of resale inventory.

“They can also offer incentives, such as mortgage rate buydowns or even price cuts, to entice buyers. When there are no suitable existing homes for sale, a new home at the right price can be a good alternative.”

Kushi highlighted the short-term risk that housing market progress could stall after recent long-term interest rate jumps in recent weeks, but said it would likely be “short-lived” with the Federal Reserve expected to slash rates at some point this year.

Against that backdrop, “the outlook for the single-family, new-home market is positive, but challenges remain,” Kushi said. “Potential homebuyers are sensitive to mortgage rate fluctuations, while builders continue to face headwinds such as higher construction costs and shortages of buildable lots and skilled labor.”

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