Overall Demand Remains Firm for Houses

Housing starts, or new home construction, came in at a seasonally adjusted annual rate of 1.42 million, a 10.3% drop compared to January’s figures. Harsh winter weather across much of the country, especially in the South (the largest construction market in the U.S.) contributed to the big drop. Even compared to a year ago (pre-pandemic), starts were down 9.3%. Builders continue to be constrained by rising material costs and a shortage of labor.

Both single- and multifamily starts declined in February, falling 8.5% and 14.5%, respectively, from January. All regions except for the West reported a slowdown in single- and multifamily starts. The West’s double-digit monthly and annual growth were not enough to buoy national activity.

Permits to build homes came in at a seasonally adjusted annual rate of 1.68 million, a 10.8% drop compared to January but 17% above year-ago levels. Both single- and multifamily permits were off during the month of February but up significantly from a year ago, signaling there is still strength in building for months to come.

Home builder sentiment, as surveyed by the National Association of Home Builders (NAHB), fell slightly in March but remains in strong, positive territory. Winter storms, rising interest rates and material costs hampered buyer activity. Some builders are slowing down in hopes they can wait out price increases. Approximately 60% of households are unable to afford the median price of a newly built home, according to a builder survey. Additional increases in prices or interest rates will squeeze out even more buyers; a quarter-point increase in the average 30-year mortgage rate will price out over 1.3 million households.

As bidding wars continue and mortgage rates rise, buyer sentiment is losing ground. Less than 50% of consumers surveyed by Fannie Mae believe now is a good time to buy; that is the lowest since April 2020. Seller sentiment remains stronger, signaling that more of the sellers who pulled back in the spring and summer (especially baby boomers) could begin to list their homes, which would provide a much-needed boost to inventories. It would also help stabilize prices.

Bottom Line
Winter weather effects on housing construction were large in February but are transitory. The real concern is the ongoing constraints on builders due to spikes in input costs (especially lumber) and the lack of available land and labor. Demographic shifts favor the housing market as more millennials come into traditional home-buying years. The important question is whether builders will be able to keep up with demand, especially at the lower end of the pricing scale where supply is extremely tight.

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