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New housing construction declined in June

Builders shift away from multifamily.

Housing starts disappointed in June, plunging 8%. May starts were revised lower. The softening of new home construction was broad-based. The silver lining is that starts seem to have bottomed in the first quarter of this year with second quarter activity coming in 4.5% higher. The concern is whether or not home prices and rents will start to reaccelerate; housing inflation seems to have only recently peaked.

Single-family starts dropped 7% in June after May’s data were revised higher to over one million units; we haven’t seen a million single-family starts since June of 2022. All regions except the West saw single-family starts weaken in the month. Compared to a year ago, starts are 7.4% lower.

Affordability remains a top concern for homebuyers, especially as mortgage rates inch closer to 7%; that appears to be the mortgage rate that causes significant pullback in home buying. Rates hit above 7% in early July. More buyers have been pivoting to the newly built market, as supply in the resale market remains scant. Listings are still about half of what they were prior to the pandemic.

Multifamily starts plunged 11.6% in June, as all regions except the Midwest saw starts weakening. Builders have been on a tear ramping up multifamily construction as the single-family market became more and more unaffordable. The hottest markets in the country, particularly in the South, have seen robust multifamily building activity to meet the influx of new residents. The largest discounts in rents are occurring in coastal markets, not in the South, signaling that strong demand for housing is keeping a floor under rents.

The number of multifamily buildings (with five units or more) currently under construction hit another record high in June at 977,000. More apartments coming on line this year and next will be good news for those waiting for rents to fall further. The biggest housing market, the South, has almost half of all apartments currently under construction.

Building permits, which provide a signal on the direction of housing construction in the months ahead, dropped 3.7% in June after being revised slightly higher in May. Weakness came from multifamily starts, as a record number of apartments coming on line has motivated builders to pivot to single-family construction. Single-family permits popped 2.2% in June and have been rising since January.

Builders have been more optimistic about market conditions as captured in the National Association of Home Builders housing market index. Sentiment remains in positive territory for the third consecutive month in July, helped in part by robust current sales of newly built homes and the prospect of strong sales six months ahead. The lack of resale inventory and the need for more houses and apartments in the hottest markets in the country has kept builders busy.

We do not expect the Federal Reserve to start cutting rates until the first half of 2024.

Bottom Line

Cautious optimism is warranted for the newly built housing market, as high interest rates, a lack of workers and land and tightening credit conditions remain headwinds for builders. Strong demand, especially from the millennial generation, should help boost housing activity as soon as rates ease. The concern is over how quickly that will occur. We do not expect the Federal Reserve to start cutting rates until the first half of 2024.

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Meet our team

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

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