With inventory back to being the No. 1 issue in many regions and prices largely remaining resilient, homebuilders appear poised to add some much needed new homes to the market, with data showing another uptick in housing starts last month.
“Homebuilders are feeling confident about the outlook for new housing demand,” said Bright MLS Chief Economist Dr. Lisa Sturtevant in a statement.
As single-family starts rose 1.6%, and overall starts increased by 2.2% from March, the report is both a further sign of growing confidence from builders as well as a small step toward addressing a long-term and large-scale crisis in inventory.
Last year, mortgage rates and broader economic uncertainty saw new construction shrink, with a significant shift toward multi-family and larger apartment construction as builders and investors took advantage of increasing rents. New single-family construction plummeted throughout most of 2022, but this recent data suggests the pullback from builders was a blip.
“Single-family starts are showing gradual improvement from the beginning of the year, and this is reflected in our builder sentiment surveys, which are up for five consecutive months,” said Alicia Huey, chairman of the National Association of Home Builders (NAHB), in a statement. “(W)e expect to see further improvement for single-family production in the months ahead.”
Multi-family starts grew 13.5% in April, as that sector continues to outperform other types of builds. NAHB Chief Economist Robert Dietz said in a statement that he expects more balance between single- and multi-family construction in the near future.
“As the Federal Reserve nears the end of its tightening of financial conditions, we expect mortgage rates to moderate in the months ahead, and this will lead to a gradual improvement in single-family production,” Dietz said. “Multi-family permits are down 23% year-over-year, and this indicates a slowdown for apartment construction is underway due to a tighter lending environment.”
Permits for new single-family grew at a rate of 3.1%, even as permits overall dipped by 1.5% from March.
While new builds make up only a fraction of sales in any given month, Sturtevant pointed out that they have become much more relevant in the 2023 market.
“With existing homeowners locked into extremely low mortgage rates, new construction is a critically important part of the supply picture,” she said.
Single-family starts are still far below where they were last year—down 28.1%. Starts remain much lower across regions and building types, and permits also remain depressed compared to the pandemic boom market.
Despite some of these positives, Sturtevant claimed that builders face plenty of barriers to ramping up production enough to meet demand, with some factors that are likely to persist well beyond the current post-pandemic recovery.
“(B)uilders continue to face obstacles, including high material costs and a lack of labor. One of the biggest challenges are local regulations that often limit the amounts of types of housing that can be built,” she said. “Unless localities allow more residential development, housing demand will outstrip supply, and housing affordability will continue to be a challenge.”
Regionally, housing starts were distributed very unevenly, with the West seeing a tremendous jump in both single-family and overall new builds. Single-family starts increased a staggering 59.5% from last month in that region.
By contrast, the Northeast—another region with major inventory problems—saw a huge 23.4% decrease in single-family starts.
Between the South and Midwest, the data was more mixed. The South saw a modest 6.1% drop in single-family starts and a 6.3% decrease overall, while the Midwest saw a hard 20.5% fall in single-family—even as overall starts rose 32.6%, meaning multi-family construction boomed in that region.
Most observers agree that the country is still not building nearly fast enough to meet housing needs, with the problem largely traced back to 2008 and the housing bubble. And economists—Sturtevant among them—have warned that affordability will remain a major problem as long as supply is constrained.
Sturtevant said that right now, demand is likely to grow both in the near term and beyond, making the supply bottleneck that much more painful.
“The U.S. adds more than 2 million people per year, and as we have emerged from the pandemic, household formation rates have rebounded,” she said. “Young adults are leaving their parents’ homes. More couples are having children. Demand for housing is high.”