New Build Market Struggles to Meet Demand

Housing starts, or new home construction, finished the year strong at 1.7 million new homes, a 1.4% jump from the month prior. Multifamily starts drove the gains as single-family starts fell compared to the previous month. Elevated costs of materials and supply chain bottlenecks remain hurdles for builders, while lack of workers and available land are adding insult to injury. The number of houses completed in December fell 8.7% from the previous month, an indication that builders are struggling to work through backlogs.

Single-family starts fell 2.3% in December and were down 10.9% from a year ago. The silver lining is that starts remained above the one million mark every month since August of 2020, a pace not seen since before the housing crisis. Builders are working to keep up with the strong pace of demand from home buyers and investors.

As mortgage rates climb, interest from potential home buyers has not waned; mortgage applications to purchase a home were up 7.9% in the second week of January. Many buyers are attempting to lock in low rates while they still can. Average new loan balances set another record at $418,500, signaling that most of the activity remains concentrated at the higher end of the market. First-time buyers without the ability to pay all cash or get larger loans remain priced out of the market.

Multifamily starts surged 13.7% in December to the strongest pace since February of 2020. Multifamily starts are now 56% above year-ago levels. Strong demand for housing, coupled with a scorching single-family market, has led many to remain renters. Rents continue to climb as occupancies hit the highest rate on record, according to one rent analytics firm. Supply is expected to be even greater in 2022 than in the previous year, which had the strongest building of apartments since the 1990s, which should help ease the pace of rental price growth.

Separately, building permits jumped 9.1%, hitting the highest pace since January of 2021. Strong permits indicate ongoing strength in construction activity for this quarter. However, supply chain delays, a shortage of workers and rising costs of construction constrain builders’ ability to keep up with demand. According to the National Association for Home Builders sentiment index, builders are slightly less confident about future sales expectations and buyer traffic; current sales conditions remain strong.

Bottom Line
Builders will continue to see heightened demand for new homes as they work their way through project backlogs. Federal Reserve balance sheet tapering followed by rate hikes will contribute to a rise in mortgage rates in 2022; however, demand for housing will remain strong, especially in the rental markets.

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