Starts soar on tight supplies

Housing starts, another name for new home construction, surged a stunning 21.7% in May after being revised lower in April. Starts are now 5.7% higher than this time last year, all due to stronger multifamily starts. Booming construction activity was broad-based; all regions except the Northeast saw starts surge in the month. Labor shortages, coupled with rising lumber costs as fires rage in Canada, will create a speed limit to how much builders can produce over the coming months. Demand from millennials and first-time buyers remains strong.

Single-family starts soared 18.5% in May to just shy of a million units; that is the highest level since June of last year. Housing remains in short supply in most parts of the country; almost all large housing markets show lower inventory levels in 2023 compared to pre-pandemic. Builders have been seeing more interest in newly built construction, especially as mortgage rate buydowns and price cuts proved effective when mortgage rates first started to spike. Newly built homes make up about a third of all home listings in a month; traditionally, this ratio has been significantly lower. A majority of current homeowners have either paid off their mortgages or are sitting on a sub-5% mortgage loan, deterring them from selling. This has frozen supply in the existing housing market.

Multifamily starts for buildings with five units or more climbed 28.1% in the month to the highest level since April of 1986; this was the year new tax legislation was passed that favored single-family rather than apartment investments. All regions except the Northeast showed gains in multifamily construction for the month.

Multifamily units currently under construction (both 2-4 unit and five or more unit buildings) have matched the previous record hit in May of 1973. A significant share of housing coming on line this year will continue to help push down rents, but not all markets will benefit. Some regions, especially in the South, are seeing continued high, net migration, while others, such as the West, are continuing to experience an outflow of workers.

Separately, building permits, which are an indicator of future construction, rose 5.2% in May. Both single and multifamily permits grew during the month. Single-family permits are strongest in the South (the largest housing market by volume) and the West, while multifamily permits were strongest in the Northeast and Midwest. Compared to a year ago, permits are down across the board as builders are working through construction backlogs; the supply of newly built homes available for sale remains above the market-clearing level.

Home builder sentiment, as measured by the National Association of Home Builders (NAHB), rose for the sixth consecutive month in June, further into expansionary territory. This signals that builders are optimistic about current and future sales. Housing completions are about 5% higher than a year ago. This figure could be larger if it weren’t for ongoing labor, land and materials shortages.