Housing starts expanded in June

July 17, 2024

New home construction, also known as housing starts, grew 3% in June after May data were revised higher. Multifamily starts led the gains, specifically in the Northeast and Midwest; the West posted a small gain during the month while the South recorded a drop in multifamily activity. Total starts were 4.4% lower compared to a year ago.

Single-family starts ticked below one million units for the first time in seven months in June, a drop of 2.2% from May. Losses were pronounced in the West and Northeast. Completions ticked up in June as over a million single-family homes completed construction in the month. Completions have been above a million units for the past three consecutive months. Labor and material shortages, land and financing availability have all been hurdles for builders, creating a speed limit on how quickly builders can ramp up in a supply constrained market.

Mortgage rates have been trending below 7% since early June, helping bring some sidelined buyers into the market. Affordability remains a hurdle, particularly for first-time buyers and those in high-cost markets. More newly built homes coming on line is good news for the extremely supply constrained housing market, but not all regions are seeing significant supply becoming available. Additionally, newly built homes tend to be priced at a premium to the resale market, although builders have been shifting to building smaller homes to appeal to first-time buyers.

Multifamily starts for buildings with five units or more jumped 22% to the highest level since February. Starts remain 23.4% below year-ago levels as builders work through near-record levels of apartments under construction. There were 880,000 apartments being built in June, down from a record high of one million but that is still much higher than pre-pandemic trends. Completions for multifamily units hit 656,000 in June, the highest level since the mid-1970s. This is good news for renters, as rents tend to cool when more supply becomes available in that market.

Building permits rose 3.4% in June due to stronger multifamily permits. Single-family permits fell 2.3% and were 1.3% lower than a year ago. Permits had been falling in the face of “higher for longer” interest rates. Demand has been hampered by already-high home prices and above-7% mortgage rates in the early part of the year. As we enter the busy spring home buying season, builders are concerned about sidelined demand and slower foot traffic.

Builders have been feeling the pain from diminished demand. Sentiment, as measured by the National Association of Home Builders, fell another point in July to the lowest level since December. Builders turned pessimistic in May when they revised their current sales expectations lower. The silver lining is that sales expectations six months out are increasing slightly, signaling that builders believe that once interest rates fall farther, more pent-up demand will be unleashed. 

The housing market is being hampered by the "higher for longer" interest rate environment, even as mortgage rates have finally fallen slightly below 7% in recent months. A rising unemployment rate and cooling overall inflation is paving the way for the Federal Reserve to start cutting rates in September. More rate cuts into the end of the year and 2025 will help boost demand for housing.