Housing Starts Decline Again

New home construction, known as housing starts, fell to a level of 1.53 million in July, a 7% drop from June’s upwardly revised data. Starts have now missed expectations for four months in a row. Both single- and multifamily starts fell in July; builders continue to face significant material, labor and land shortages. We expect residential investment to remain soft in the third quarter.

Single-family starts fell 4.5%. All regions except the Midwest suffered losses. Single-family starts are still up 11.7% from a year ago. That is the lowest year-on-year gain in five months, meaning we are still comparing to pre-pandemic boom figures. Single-family starts have remained above the one million mark for a year but it is not enough to meet the extra demand triggered by the pandemic.

Multifamily starts of five units or more fell 13.6% in July; the South is the only region where multifamily starts grew. More potential homebuyers are being priced out of the market and deciding to rent for longer. Rents have been rising as more people return to larger city centers or resort to renting in the smaller cities they moved to during the pandemic.

Separately, permits to build a home grew 2.6%, ending three straight months of losses. Multifamily permits led the gains while single-family permits fell for the fourth consecutive month, hitting the lowest level in a year. Builders are focused on working through backlogged orders.

Homebuilder sentiment fell to the lowest level in a year in August. Sentiment remains positive but current sales and traffic are slowing as skyrocketing prices sideline buyers. Additionally, high material costs are prompting builders to pass on costs to buyers. Sentiment remains strong for sales six months out since builders expect bottlenecks to ease next year.

Mortgage applications fell in the week ending August 13; refinance applications remain above pre-crisis levels while applications to purchase are in line with 2019 levels. The rise of the Delta variant and skyrocketing prices have left would-be buyers disenchanted with the idea of owning a home; consumer attitudes about home buying have dropped to 1980 levels.

The average loan size for new mortgages came off the record highs earlier in 2021 but remains elevated compared to pre-pandemic levels. Home prices are still rising in many markets as builders and sellers slowly add supply. Bidding wars and record prices are a byproduct of the lack of supply. Speculators have entered the bidding wars and are crowding out first-time buyers.

Bottom Line
Builders will remain busy into 2022 as they work their way through backlogs while supply chain issues finally ease in the second half of the year. More supply will come on line but at the higher end. First-time buyers will remain sidelined as high home prices persist.

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