Shortages Curb Home Building

New home construction, known as housing starts, unexpectedly fell 0.7% in October following September starts that were revised down. October marks the second straight month of declines. Single-family home starts made up all of the losses during October. Single-family starts have fallen four straight months as builders struggle with labor shortages and supply chain bottlenecks. Lack of available land is a growing concern; more builders report a very low supply of lots.

Single-family starts fell to an annualized rate of 1.04 million, the lowest since August 2020. The decline was broad-based with every region in the country posting losses for October.

Single-family starts, however, remained above the one-million mark for the 15th month in a row at a level not seen since 2007. It is still not enough to meet demand as many more millennials enter their household formation years.

Prices have been skyrocketing for single-family homes since early 2021, pricing out many would-be buyers completely. With the Federal Reserve expected to begin raising interest rates earlier next year, mortgage rates will rise, making the cost of purchasing a home even more expensive.

Multifamily (five units or more) starts rose 6.8% as many renters who had fled city cores have been returning, driving up demand for apartments. Prices have been rising for rentals, especially in the cities that had excess inventory when the pandemic first hit. Rents on all properties are now rising at a double-digit pace on online housing and apartment listing sites; measures of rents in the consumer price index (CPI) have moved up but tend to lag overall market increases. We expect apartment demand will remain strong, especially in the face of record-high home prices and future rate increases.

Separately, building permits rose 4% in October, above expectations, as builders attempted to work through delayed projects, but backlogs are mounting. Permits for single-family homes rose to 1.1 million, the highest rate since May. Single-family homes authorized for construction but not yet started rose to the highest level since August of 2006 while multifamily homes reached the highest level in almost 22 years.

Home builder confidence, as measured by the National Association of Home Builders, rose in November amidst ongoing shortages of labor, land and materials. Confidence now sits at the highest level in six months with current sales conditions and buyer traffic remaining strong. Inventory in the existing home market remains tight, driving many buyers, especially those flush with cash, to new build.

Bottom Line
Demand for housing continues to outstrip supply, despite staggering price increases. First-time buyers are being priced out of the housing market and flocking to rentals as they return to offices. Builders have a growing backlog of projects that will continue into next year as supply chain bottlenecks are not expected to ease until well into 2022. Residential investment will remain a drag on overall growth in the fourth quarter.

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