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New Residential Construction Activity Increases in October

In October, new residential construction activity experienced a rise, with an annual rate of 1,372,000 starts, a 1.9% increase from September’s upwardly revised level. Both single and multi-family starts showed an increase month-over-month. Single-family starts rose to a 970,000 home pace in October, which is 0.2% higher than September and 13.1% higher than the previous year. High-density multi-family starts (in buildings of 5+ units) increased 4.9% month-over-month to a 382,000 unit pace, but remained 31.8% below last year’s levels. This steadiness in housing starts is impressive, considering the lackluster sentiment among builders.

New Construction Chart 2023-11-17

Impact on Homebuyers, Sellers, Homeowners, and the Housing Market

As mortgage rates surged, homebuilder sentiment continued its free-fall, dropping to an index level of 34 in November, the lowest level since December 2022. The recent moderation in inflation and the reduction in mortgage rates both preceded and ensued after the majority of data collection for the builders’ data, so the outlook is likely to improve. Nevertheless, a higher share of builders reported cutting prices in November (36%) vs. the prior two months (32%), indicating that higher mortgage rates had an immediate impact on buyer willingness to pay, prompting builders to react.

Housing Permit Trends

In October, permitting activity rose by 1.1% month-over-month to a pace of 1,487,000 total permits, just 4.4% lower than the previous year. Monthly gains were seen in all types of housing, with single-family up 0.5%, low-density multi-family up 2.0% (2-4 unit buildings), and high-density multi-family up 2.2% (5+ unit buildings). From one year ago, while single-family permits ticked up an impressive 13.9%, they did not fully offset more significant declines in multi-family, especially high-density multi-family (-27.8%). Regionally, single-family permitting was up from a year ago in all four regions and gained monthly in the Northeast and West, while slipping in the Midwest and South.

Completions and Housing Supply

Home completions eased down 4.6% month-over-month in October to 1,410,000 completions but remain 4.6% higher than one year ago. Single-family completions registered just shy of the 1 million mark, a level maintained fairly steadily since 2021 (993K; -0.9% M/M; +2.0% Y/Y). The elevated level of construction coming to market is likely to mean that new homes continue to be a higher than usual share of homes on the market for sale.

Multi-family completions slipped 12.6% month-over-month to a pace of 408,000 but remain up 14.3% year-over-year as multi-family construction activity continues to flow through an elevated under-construction pipeline. While down from its July 2023 peak of more than 1 million units in high-density buildings under construction, October’s 987,000 units in 5+ multi-family buildings would still surpass any prior peaks. This additional rental inventory is likely to mean elevated completions and rental supply through 2024, helping to relieve pressure on rent prices.

Looking Ahead

In their most recent meeting, the Fed once again kept rates steady, with Chair Powell noting that the committee was not yet confident that its policy stance was sufficiently restrictive. While another hike in December is on the table, it is possible and even likely that incoming data will convince the Fed’s voting members that they have done enough. However, the Fed is cautious, with Chair Powell noting at a mid-month event that “inflation has given us a few head fakes.” Fortunately, both labor market and inflation data have been right in the confidence bolstering zone, factors that have helped drive mortgage rates down from recent peaks and may set the housing market up for a more robust first quarter. Today’s construction data is similarly in the right spot—strong enough to fend off recession fears, but weak enough to signal that higher borrowing costs are having their intended impact.

Orginal article: Link To Article – provided by Kansas City Realtors