New home construction, known as housing starts, fell in April after March activity was revised lower. Losses in construction were concentrated in single-family homes; multifamily starts jumped to a 36-year high. The total number of units (single and multi) currently under construction hit a record high at 1.64 million; that is largely due to unprecedented backlogs in the home building sector.
Single-family starts fell 7.3% to 1.1 million units in April. All regions except the West saw construction soften. Compared to a year ago, single-family construction is 3.7% higher; however, growth is expected to slow due to rapidly climbing mortgage rates. Since the start of the year, mortgage rates have risen an average of 2 percentage points and experienced the fastest annual growth. A recent Gallup poll showed that those saying it is a “good time to purchase a home” slipped to the lowest level on record; the survey covers the stagflation of the 1970s and the Volcker recessions of the early 1980s when mortgage rates jumped well into the double digits.
Multifamily starts soared 16.8% to 612,000 in April, the highest pace since 1986. Activity was strongest in the South, the largest housing market in the country. Many people flooded the South since the start of the pandemic, which is why most markets in this region have experienced the largest home price increases on record. As mortgage rates rise, more people are remaining renters; builders are taking notice.
Separately, building permits, which provide insight into the direction of housing construction, fell 3.2% in April after being revised slightly higher in March. Permits for single-family construction fell by 4.6% while multifamily was flat. All regions saw permits slip, with the exception of multifamily permits in the South.
Builders have been feeling the pain from both supply-chain bottlenecks and higher input prices while rising mortgage rates are cutting into the demand from potential buyers. Homebuilder sentiment fell to the lowest level in two years in May. Builders are seeing less foot traffic and expect sales to be softer as we enter the busy home-buying season.
The housing market is among the most interest-sensitive of sectors. Large backlogs, acute shortages of new space and strong demand for rentals will dampen but not derail the drag of higher mortgage rates. The multifamily market is expected to hold up better, reflecting the surge in demand for rentals. The single-family market is looking much more prone to a bust given the froth in prices and hurdles to affordability.
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