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Housing Starts Lose Ground

RFP
New home construction, known as housing starts, fell 1.6% in September; August data was revised down. Starts hit a rate of 1.56 million units, the lowest level in six months. The drop in multifamily activity dominated the report; multifamily construction data tend to be noisier than single-family.

Strong activity in the West and Midwest was not enough to offset losses in the Northeast and South. Builders continued to face significant material shortages and shipping delays as demand for new housing, especially on the higher end, remained robust in the third quarter. Homes under construction but not yet completed hit the highest pace in 47 years. These delays are not expected to ease until the end of next year.

Single-family starts were flat from August and remained above the one-million mark for the fourteenth consecutive month. Single-family construction fell 2.3% from a year ago, the first annual drop since May of 2020 when builders were ramping up after pandemic induced shutdowns. Affordability remains a large concern for home buyers while the shortages of land, materials and labor are hampering builders’ ability to keep up with projects. The number of single-family homes currently under construction sits at a 14-year high.

Multifamily starts of five units or more fell 5.1% in September as construction in the Northeast fell by almost half while activity in the South softened. Flooding from Hurricane Ida in the Northeast disrupted construction activity. Demand for multifamily housing has been strong as single-family home prices have been hitting historic highs. Construction of multifamily homes is up 38.2% from a year ago. Delays continue to mount. The gap between the number of units started versus completed construction has been widening for the past two months.

Separately, permits to build a home plunged 7.7%: builders are hesitant to pursue new projects while supply chain bottlenecks and labor shortages persist. Multifamily permits plunged 21% to 498,000, coming off August’s six-year high. Single-family permits, at one million, remain above the pre-pandemic trend, however, are significantly lower than the peak hit in January of this year.

Builder confidence rose in October to a three-month high as current sales activity continues to fuel optimism. This activity is driven by those with higher incomes, as the surge in existing and new home prices is sidelining first-time and low-income buyers. Home buyer sentiment has soured since the spring and could remain low as mortgage rates start to climb at the end of 2022.

Bottom Line
Home building activity will be stable in the fourth quarter, which traditionally sees the slowest construction activity. The pandemic has distorted traditional trends. Builders will remain busy working through backlogs of projects while supply chain issues will not ease this year. Homebuyers at the higher end are continuing to fuel demand. The Federal Reserve is expected to begin tapering its balance sheet purchases as soon as November with rate hikes becoming more likely at the end of 2022.

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