Housing starts dipped in December

January 18, 2024

New home construction, also known as housing starts, fell 4.3% in December after November data was revised slightly lower. The West was the only region that did not experience a drop in activity. Compared to a year ago, housing starts are 7.6% higher, supported entirely by growth in single-family home construction. A shortage of homes across the country has pushed builders to focus on more single-family projects as multifamily units are finished. Nearly half a million apartments were completed in 2023, the largest annual completion rate since 1987.

Single-family starts plummeted 8.6% in December but remained above the one million mark for the second consecutive month. Compared to the same time last year, starts are 15.8% higher, reflecting stronger activity in the newly built market at a time when the supply in the resale market is scarce. Builders have been offering incentives, such as mortgage rate buydowns, to give buyers some breathing room at a time of high rates. In December, the 30-year fixed mortgage rate fell below 7% for the first time since August. Many buyers are still waiting on the sidelines for rates to fall further this year, while sellers are also frozen in place as a majority of them have paid off their mortgage entirely or have a sub-5% mortgage rate.

Multifamily starts for buildings with five units or more jumped 7.5% in December to the highest level since July. Starts remain 9.5% below year-ago levels, when the activity in the multifamily space was picking up. Builders focused on multifamily homes as mortgage rates started to price buyers out of home ownership. Nearly a million multifamily units are currently under construction, a multi-decade record.

Separately, single-family permits rose 1.7% in December as more building activity is expected this year. Permits are now 32.9% higher than a year ago and solidify builders’ intentions to build more housing. Builders are unable to ramp up fast enough to meet the significant demand from millennials and first-time buyers; lack of labor and land availability are hurdles. A million homes were completed in 2023 and in 2022, the highest level since 2008; the pace of completions post-housing bust was about half of that, contributing to the significant shortages of homes today.

Building permits for multifamily building with five units or more rose 1.4% but is 26.6% lower than a year ago. Builders expect less activity due to the significant supply of apartments coming online in 2023 and 2024. Rents are expected to be lower by the end of 2024 as more rentals are available.

Home builders are becoming more optimistic to start the year as sentiment ticked up in January for the second consecutive month. More activity in the single-family market is expected as mortgage rates continue their downward trajectory. If the soft landing expectations for the economy become a reality, mortgage rates have further to fall, which will help boost demand from first-time buyers. Builders are already preparing for this scenario with higher construction plans for the year.