Housing starts rebound

Housing construction is showing resolve in the face of high mortgage rates.

New home sales
Yelena Maleyev

Yelena Maleyev

Senior Economist, KPMG Economics, KPMG US

+1 312-665-2443

Housing starts, or new home construction, jumped 9.8% in February after falling for five consecutive months. January starts were revised higher. Both multifamily and single-family starts contributed to the gains in the month. February activity blew past expectations. The number of completions rose to 1.56 million, the highest since 2007. Builders are focusing on finishing projects in the pipeline, especially in the multifamily space.

Single-family starts rose 1.1% in February, but remain 31.6% below year-ago levels. The single-family sector has been suffering due to a loss in demand from rising mortgage rates. Recent turbulence in the markets caused the 30-year rate to drop in March, bringing some reprieve to those on the sidelines. Applications are expected to be boosted by even a small drop in rates; however, they will remain muted compared to last year’s flurry of activity. With the lack of available supply in the resale market, the return of buyers will provide a boost to new home construction.

Multifamily starts soared 24% higher in February, with all regions except the Northeast showing strong activity. Multifamily projects respond to rate increases with a lag, and with the number of projects currently under construction at a historic high, builders will be busy finishing units into the end of the year. As more supply comes on line and rents drop further, builders will pivot back to single-family construction in 2024, especially if mortgage rates drop further.

Separately, the National Association of Home Builders’ (NAHB) sentiment index rose for the third consecutive month in March but remains in negative territory. Sentiment appears to have bottomed in December. Builders of new homes are gaining optimism about current sales prospects, but rising uncertainty about credit conditions keep them skeptical about momentum returning later this year.

Builders are still facing labor and lot shortages, high construction costs and supply chain concerns for various inputs. Costs for materials such as concrete remain elevated. Infrastructure projects from increased federal funding are now competing for the same workers as the housing sector. Activity will be slow to start, as strict immigration policies and the aging of construction workers are not creating a strong pipeline.


Bottom Line:

Housing construction is showing resolve in the face of high mortgage rates and muted demand. Millennials aging into their prime, home buying years, coupled with strong net in-migration to the South, are expected to buoy demand on the other side of a recession. The concern is whether the Federal Reserve will have a longer fight against inflation ahead of it, especially if it pauses its policy tightening regime in order to provide some stability to markets. That could mean more rate hikes in the second half of the year. 

The Federal Reserve will have a longer fight against inflation.