Strong Starts in November

Housing starts, another name for new home construction, surged to a level of 1.68 million in November, blowing past expectations; that was the strongest pace of growth in eight months and the second strongest since 2006. October starts were revised slightly down. Both single- and multifamily starts rose by double digits in November. Strong demand and lean supply in the resale market remain a boon for builders.

Single-family housing starts increased by 11.3% in November as all regions registered growth in construction. Demand remains strong into what is traditionally a slower construction season, with investors, second-home and move-up home buyers snapping up properties with cash. Housing affordability is already a challenge for many first-time buyers. With mortgage rates expected to rise in 2022, affordability will be challenged even further, especially as more millennials enter their prime household formation years.

Multifamily starts of five units or more hit their highest level in 2021, surging 12.1% in November. Growth was especially strong in the South, the nation’s largest housing market. The pandemic initially spurred many people to move out of city centers, but now workers are returning to cities. First-time buyers are being priced out of a very hot housing market. Many of those who fled high-cost metro areas found themselves renting instead of buying in their new, more affordable cities. Rents are rising, with apartment vacancies hitting record lows in many parts of the country. This will remain a strong sector for growth, as renter demand is buoyed by demographic shifts and rising mortgage rates in 2022.

Separately, building permits, which are an indicator of future construction activity, rose 3.6% in November. Home builder sentiment, as measured by the National Association of Home Builders, hit its highest level for the second time this year in December. This is amidst rising material prices and acute labor shortages. Builders are confident that the demand they are seeing will remain strong, as the supply in the existing housing market is not enough to meet the burgeoning demand from pandemic-era buyers and demographic shifts.

Bottom Line
The pandemic continues to distort the seasonal trends in the housing market, with construction activity ending 2021 with a bang. The Federal Reserve will be winding down its asset purchase program faster, by the first quarter of 2022; rate hikes are on the horizon for next year. This will cool demand for homeownership as mortgage rates rise, but demand for rentals will remain high. Builders will continue to work through backlogs of projects into 2022 as supply chain bottlenecks and labor shortages persist.

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