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Builder Backlogs Blunt Impact of Higher Rates

RFP
New home construction, aka housing starts, missed expectations to start the year at 1.64 million, a 4.1% drop from the elevated pace of December. Activity in both the single- and multifamily construction sectors was weaker. The South and Midwest reported the largest losses as winter storms and supply chain bottlenecks hurt builders’ ability to keep up with projects. The number of homes under construction continued to climb in January, though the total of homes completed continued to slip; the gap has been widening for three months, further evidence that supply is unable to keep up with demand.

Single-family starts remained above one million units in January but fell 5.6% from December levels. The inventory of homes available for sale has been at record-low levels for most of the past year, pushing many home buyers into the new-build market. Investors have also flooded the market as home prices skyrocket across much of the country. Rising mortgage rates are not expected to fully close the gap between supply and demand.

Multifamily starts were above the half-a-million mark for the second consecutive month despite the return of winter weather disruptions. Unseasonably mild winter weather gave multifamily starts an extra boost in December. Many would-be home buyers have been crowded out of the market and forced to rent. That, combined with low vacancy rates and the end to rent moratoriums, is pushing up rents and construction in the apartment market. Vacancy rates in some parts of the country have hit record lows.

Separately, building permits exceeded expectations by hitting 1.9 million units: that is 0.7% above December activity; single-family permits led the charge while multifamily permits for buildings with five units or more slipped. Permits are now at levels last seen during the end of the housing boom in 2006.

Builder sentiment, as measured by the National Association of Home Builders (NAHB), slipped for the second month in a row in February but remains high. Builders are optimistic about the level of demand in both the single- and multifamily sectors.

However, delays to production, added to the lack of labor and land, are pushing costs higher and lengthening completion times. By the end of 2021, NAHB calculated that the rising price of lumber alone is adding $18,600 to the price of a new home. Wildfires, tariffs on Canadian lumber and a shortage of workers at lumber mills will keep prices elevated this year. Overall, costs are up 21% from one year ago.

Bottom Line
While supply chain bottlenecks are easing for some industries, the construction sector will continue to face delays. With building permits rising, the pipeline for new construction remains firm. Rising mortgage rates will cool demand for single-family homes but long backlogs should blunt the blow of higher rates to construction activity. That, ironically, makes the Federal Reserve’s job of cooling inflationary pressures even harder in the near-term.

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