New home construction soars

September 18, 2024

Housing starts, another name for new home construction, soared 9.6% in August. The boost came from single-family starts; multifamily starts trended lower. Homes currently under construction have been on the decline for nine consecutive months as builders pivoted to completing projects rather than starting new ones, but that trend could be reversing. Completed home construction jumped to 1.79 million units in August, the highest level since January 2007. That is good news for the supply-constrained housing market, but not all regions are seeing gains; the South recorded 1.1 million completions.

Single-family starts surged 15.8% at just under one million units. One million homes were built in both 2021 and 2022 before trending lower in 2023. There is a speed bump to how quickly builders can ramp up production, even if interest rates are cut. Labor and land shortages slow the pace of construction. The average 30-year fixed mortgage rate declined to its lowest level since February 2023 in September and has farther to go once the Federal Reserve begins its rate cutting cycle. The recent drops have spurred mostly refinancing activity, as many would-be buyers are holding out for even lower rates.

Multifamily starts of buildings with five units or more plunged 6.7% in August and were 6.2% lower than a year ago. Builders have pivoted away from multifamily construction after a record one million units were under construction in 2023. Rents have been falling in regions that have seen the most new construction coming on line. The reprieve in rents, however, is temporary as strong demand has soaked up the new supply. Less supply in the pipeline is a sign that rents will begin to increase in the near future.

Separately, building permits, which are an indicator of future construction activity, jumped 4.9% in August; gains were broad-based. Single-family permits rose 2.8% while multifamily with five units or more rose 8.4%. Compared to a year ago, permits remain soft, but the recent uptick is a positive sign.

Builders have remained pessimistic about market conditions in September, as evidenced in the National Association of Home Builders’ sentiment survey. The silver lining is that sales expectations rose to positive territory, reversing the downward trend of the last four months. 

Construction activity is picking up on the heels of falling mortgage rates. Even lower rate expectations for this year and next will help builders regain their footing after a disappointing summer. Sidelined buyers are waiting for more rate cuts, while many builders are still offering incentives such as mortgage rate buydowns to convince them. Residential investment is expected to start boosting growth as early as the first quarter of 2025.