Housing Starts Reach 2006 Levels

New home construction, known as housing starts, ticked up slightly in March after being revised higher for February. Starts now sit at the highest level since June of 2006. Builders continue to face challenges including lack of labor and land to build on, in addition to higher costs and delivery times for building materials. The gap between the number of homes started versus completed hit the highest level since 1984. The gap is pronounced for both single - and multifamily starts as builders work their way through backlogs.

Declines in single-family starts were mostly offset by a rise in multifamily starts. Higher mortgage rates will continue to impact single-family construction more negatively than multifamily.

Apartment demand has been on the rise, with record-low vacancy rates across many hot markets in the U.S. Investors and builders are pivoting to multifamily construction, expecting demand for rentals will only heat up as mortgage rates continue to rise. The percentage of renters hoping to buy a home dropped to the lowest level on record in the Federal Reserve Bank of New York’s housing market survey. The data dates back to 2014.

Building permits, which are indicative of future construction activity, ticked up slightly in March from upward revisions to February data. Single-family permits fell 4.8% from a month ago while multifamily permits for five units or more jumped 10.9%. Strong activity in the Northeast and Midwest, the smallest markets in the country, drove the bulk of the gains. Record-high home prices and lack of housing supply are cooling demand from home buyers as mortgage rates tick up. Builders have taken note.

Sentiment, as measured by the National Association of Home Builders, has fallen for the fourth consecutive month in April. Lower buyer traffic dragged down the sentiment index. While the index remains in positive territory, this signals that higher mortgage rates and supply chain bottlenecks are taking a toll on builders’ ability to add housing. By one estimate, we are short almost four million homes in the U.S., just to keep up with household formation.

For the week of April 14, the average mortgage rate crossed the 5% threshold, the highest sustained increase since 2011. Higher mortgage rates hit refinancing activity harder than new mortgage applications; the refinancing share of mortgages fell to just over a third of all loans, compared to over half a year ago. In a record-high home price environment, however, any rise in the mortgage rate is hitting home buyers even harder, and will contribute to a drop in new mortgage applications.

Bottom Line
Mortgage rates will continue to increase this year as more potential home buyers are priced out of the housing market and continue to rent. The war in Ukraine and China’s slow reopening from COVID lockdowns add insult to injury to already congested ports and backlogged materials deliveries. Builders will continue to face challenges in 2022.

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