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Multifamily Drives Housing Starts

RFP
Housing starts, or new residential construction, came in at a 1.62 million unit pace in August, growing 3.9% above upwardly revised July figures and exceeding expectations. The growth was driven entirely by strength in multifamily construction. Builder backlogs are still accruing even though materials prices like lumber have come off pandemic highs. The lack of labor remains a major hurdle and adds to lags in construction.

Single-family starts fell 2.8% in August; losses were felt in the West and Midwest while the South eked out growth. The Northeast experienced a 52% surge from a small base. Compared to a year ago, single-family starts are 5% higher nationally. In August of 2020, single-family construction finally hit the one-million mark and has stayed above it ever since. This is still not enough construction to meet the outsize demand stemming from both pandemic-related moves and millennials entering their prime home-buying years.

Household formation has been steadily climbing since losing ground in the 2008 recession; there have been 13 million new households formed in the last ten years, including both renter and owner households. However, construction has been slow to regain its footing since the subprime crisis. Just over seven million single-family homes have been built during this time.

Multifamily starts of five units or more jumped 21.6% in August, rising above the half-million mark for the first time since the pandemic. Multifamily activity in the South and West slipped while the Midwest and Northeast experienced strong growth. Multifamily activity is more volatile month-to-month. However, with many priced out of the single-family home market, strong demand for condos and apartments will keep builders busy into 2022.

Separately, building permits rose 6% in August, exceeding expectations for the month. They were driven mostly by strength in the multifamily sector. Permits are almost 14% above year-ago levels, driven entirely by the 53% annual growth in multifamily. In August, permits were especially strong for multifamily activity in the South, where many flocked to when the pandemic began. Strong permit activity will boost building activity into the end of the year and 2022.

Builder sentiment rose slightly in September, remaining in positive territory as current sales conditions and buyer traffic strengthened. Sales expectations for the next six months are strong. Builder and buyer sentiment have diverged since the spring as buyers are being priced out in many regions. Sellers and builders say they are confident because demand still exists; however, the bulk of it remains in the upper end of the market.

Bottom Line
Demand remains strong in the single-family home market. Record price growth and lack of inventory at the lower end are deterring would-be buyers from purchasing their first homes. Renting remains a feasible option while existing home inventory trickles into the market. Multifamily construction is benefitting. Supply chain bottlenecks and lack of workers will keep a cap on building activity for the year.

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