March housing starts retreat

April 16, 2024

Housing starts, another name for new home construction, plunged 14.7% in March after February data was revised significantly higher. All regions except the West saw starts deteriorate. Both single- and multifamily starts turned lower; however, single-family starts remain 21.2% higher than a year ago. Low supply in the resale market and strong demand from millennials are providing a boost to the newly built market, especially as builders can offer mortgage discounts and pivot to building smaller homes for lower prices. The lack of workers, land and materials are still speed bumps to how much builders can ramp up.

Single-family starts fell 12.4% in March but remain above a million units for the fifth consecutive month. Even as mortgage rates ticked back up in February and remained high into the start of April, demand from millennials aging into their prime home buying years, and from older homeowners looking to trade up, have kept builders busy. Until more supply is released into the resale market, demand for newly built homes will stay robust.

Multifamily starts plunged 20.8% to the lowest level since April 2020, when uncertainty was soaring at the height of lockdowns. Multifamily starts are now 43.7% lower than a year ago primarily due to the strong building we saw in 2022 and 2023. Over half a million apartments came on line in the past few years with more expected to be completed in 2024. This strong supply release has made builders pivot back to single-family construction, where the supply shortages are keeping a floor under prices. Rents have fallen in many parts of the country, but that may be short-lived. As less supply is being started for apartments and more demand is still on the sidelines from household formation, rents are expected to rise again.

Separately, building permits, which are an indicator of future construction activity, slumped 4.3% in March. Single-family permits were 5.7% lower in March but still 17.4% higher than a year ago. Multifamily permits for buildings with five units or more were flat on the month but 22.1% lower than a year ago, illustrating builders’ intentions not to continue bringing more supply to the market.

Builders remained optimistic in April as sentiment measured by the National Association of Home Builders came in at the same rate as March, the second consecutive month for an optimistic reading. Present sales activity ticked up while sales expectations for the next six months fell slightly. Builders are aware of the impact that high interest rates have on prospective buyers so they are offering mortgage discounts and other incentives to incent buyers. However, high rates are hitting their margins and their ability to get financing.

Newly built housing remains in demand as a lack of supply in the resale market has pushed buyers to consider other options. A deterioration in construction in March is not yet a cause for concern as starts remain above a million units for single-family homes. Multifamily starts continue lower as 940,000 units are still under construction while half a million units are being completed. The regions seeing the influx of new apartments are also regions in high demand for housing. Strong immigration over the past few years, coupled with demographic tailwinds, will keep a floor under prices for homes and apartments, even in a high interest rate environment.