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Weak demand weighs on housing starts

Risks to the downside are growing.


Housing starts, another name for new home construction, plunged 4.5% in January from December’s downwardly revised figures, missing expectations. Starts opened the year 21.4% below year-ago levels, sitting at just 1.31 million units. Both single-family and multifamily construction declined in the month.

Single-family housing starts declined 4.3% from December’s downwardly revised figures. Single-family construction has been hovering below its pre-pandemic levels since June of 2022. Strength in the South and Midwest failed to offset losses in the West and Northeast. A lack of workers and land and the high costs of materials still plague builders as demand for new housing wanes. Many first-time buyers have been priced out of the market due to high home prices and rising mortgage rates; new build tends to be priced higher than resale homes.

Mortgage applications to purchase a home picked up in early January after slumping in December. Activity tends to pick up when mortgage rates slip; however, we expect mortgage rates to remain in the above-6% range for most of this year. February applications have already softened as rates ticked up slightly at the start of the month. A fall in interest rates at the start of next year is expected to resuscitate the pipeline for home buying.

Multifamily housing starts of five units or more tumbled 5.4% from December’s upwardly revised figures. The multifamily data is more volatile and subject to revisions. All regions except the West saw multifamily construction soften.

Multifamily units currently under construction hit another multi-decade high in January, while units being completed ticked lower. The gap shows there are still delays and bottlenecks that builders must work through. Multifamily activity responds differently to changing interest rate conditions and is expected to hold up better this year than single-family.

Building permits, an indicator of future activity, slipped 1.8% in January for single-family units in the eleventh consecutive drop. Compared to a year ago, single-family permits are 40% lower, the largest annual drop since April 2009. The South, the largest single-family housing market in the country, pulled down most of the activity. A rise in net migration to many southern states, such as Texas and Florida, means that demand for housing in the South will remain robust in the long term.

Building permits for multifamily structures of five units or more ticked up slightly, with the South and Midwest leading that move. Permits remain slightly above their pre-pandemic average, with more supply of multifamily buildings expected to come online this year. Activity is expected to slow in 2024, as supply outweighs demand in many hot markets of the country. Rents are already starting to slip in some regions and are expected to fall further, based on rising vacancy data.

Construction for new housing will remain muted, mostly driven by losses in the single-family market, until mortgage rates and prices fall.

Separately, the National Association of Home Builders Housing Market Index shows builders are becoming more optimistic about housing market conditions. The index remains in what is considered contractionary territory but actually rose for the second consecutive month in February. The index is correlated with single-family home construction and could be signaling a rebound in activity around the corner, but risks remain. 

Bottom Line:

Construction for new housing will remain muted, mostly driven by losses in the single-family market, until mortgage rates and prices fall later this year or early in 2024. Multifamily construction will remain strong for most of this year, but will soften in 2024, as overbuilt markets attempt to rent out excess inventory. Risks to the downside are growing as reinflation in some goods and commodities signals the Federal Reserve’s job in fighting inflation is far from over. The length of time to the first rate cut is increasing.

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Meet our team

Image of Yelena Maleyev
Yelena Maleyev
Senior Economist, KPMG Economics, KPMG US

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