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Green shoots appear in housing

Builder sentiment is turning positive.

New home construction, also known as housing starts, fell a less-than-expected 0.8% to 1.42 million in March. February starts were revised lower. A pick up in single-family starts was not enough to offset a drop in multifamily; until recently, the opposite had been true with multifamily construction doing much better than the single-family market.

Unseasonably cold weather in March pushed down activity, especially in the Midwest and West. Inventories remain tight. The West has shown more weakness than other markets, reflecting weakness in the tech and finance sectors.

Single-family starts grew 2.7% in March but are still below the peak hit in 2020. Builders have been quicker to respond to housing market conditions than existing homeowners, providing price cuts and mortgage rate buybacks as incentives. Single-family new builds are now one-third of all inventory on the market, a record high. Inventory in the resale market is still about half what it was in 2019.

Shortages of workers, materials and lots continue to plague builders, along with tighter standards on loans for developers. More single-family homes were completed than started in March, a trend that has been underway since July of 2022.

Multifamily starts, a more volatile data series, fell 5.9% in March; construction of buildings with five units or more led the losses with a 6.7% drop. Compared to a year ago, starts are up 6.1%, with all the activity supported by the South, the largest housing market.

The number of multifamily buildings of five units or more currently under construction continues to hit new records, reaching 941,000 in March. More supply coming on line this year and into 2024 will help push down rents, which have already started to roll over in many parts of the country. This is hoped to provide a much-needed cooling of shelter costs, although it shows up with a lag.

Residential investment will stop being a drag on growth by early 2024.

Building permits fell 8.8% in March, suggesting more weakness going forward; the weakness was concentrated in the multifamily market. Single-family permits, which plummeted a year ago, have been ticking up for the past two months. The housing sector is the first in and first out of a recession. The timing of a turnaround depends heavily on whether we can avoid a rise in unemployment. Shortages of homes for sale have also helped to buoy construction, as millennials are aging into their prime home buying years and willing to take an adjustable-rate mortgage to get in the door.

Separately, home builder sentiment as measured by the National Association of Home Builders (NAHB) ticked up for the fourth consecutive month in April but remains in contractionary territory. Optimism about current and future sales activity turned positive for the first time since June 2022.  Mortgage applications are still about 30% below year-ago levels, but the gap is narrowing. Even small declines bring would-be buyers in from the sidelines.

Bottom Line:

Supply in the resale market remains tight, as most homeowners either own their homes outright or are sitting on sub-4% mortgage rates. Builders have taken note and are pivoting back to single-family projects as more multifamily projects are completed. The housing market is expected to rebound later in the year; residential investment will stop being a drag on growth by early 2024.

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Meet our team

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

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