Multifamily construction plummets

December 18, 2024

Housing starts, another name for new home construction, slumped 1.8% in November to 1.29 million units. The weakness appeared in the multifamily segment, as single-family construction soared. Starts overall remain 14.6% below year-ago levels.

Single-family construction jumped 6.4%, hitting above one million units for the month. The South led the charge as all other regions posted losses. Construction in the South hit the highest level since February of this year following hurricane devastation in October. Many builders had put construction on pause while official wealth statistics from the Federal Reserve showed a drop in homeowner’s equity of about $237 billion in the third quarter due to the losses of homes in the hardest hit states. Construction resumed in November and is expected to be strong through year-end.

Multifamily construction plummeted 24.1% to 264,000 units, the lowest level since March. Starts fell 28.8% below year-ago levels. Only the Northeast registered growth. New multifamily construction has been slipping as builders work through backlogs. Units under construction now sit at 780,000, down from one million, a record hit in mid-2023. Completions remain above their pre-pandemic trend at 544,000 units, which is helping to cool rents. Rent declines will reverse in 2025 as the supply pipeline shrinks.

Permits grew 6.1% in November on stronger multifamily permits; single-family permits eked out a gain. Single-family permits are still lower than a year ago but have been growing steadily over the last three months. The largest housing market in the country, the South, has fueled the growth. Multifamily permits leaped 22.1% to the highest level in 13 months; all regions saw permits grow as absorption of newly built units remains in good shape. Even as people are priced out of the single-family housing market, they are still forming households and need someplace to live.

Separately, builder sentiment as captured by the National Association of Home Builders flattened in December after three months of gains. Sentiment remains in pessimistic territory as high interest rates and labor and material shortages hamper builders’ ability to ramp up. The sales expectations six months out index jumped to the highest level since April 2022, when mortgage rates were just starting their upward climb. Current sales conditions were muted while foot traffic slumped. Over half of builders are still offering some sort of sales incentives; the largest builders have gained even more market share through their use of mortgage rate buydowns. Consolidation in the single-family sector is poised to accelerate as the Federal Reserve slows the cadence of rate cuts in 2025. 

The newly built market is struggling to ramp up, despite ongoing supply shortages in the existing market.  The age of existing homes has increased, which raises the costs of maintenance. A tailwind in early 2025 could be the disaster aid added to the continuing resolution to keep the government open through March. Post-hurricane rebuilding will further stress already scarce resources for builders; the speed limit on single-family is currently about a million a year, well below the three million homes needed to meet current demand. Mortgage rates remain elevated, but have fallen from the high in November, which could unleash some demand through the year-end. Bond yields have moved up on fears of inflation and ballooning deficits, which along with quantitative tightening by the Federal Reserve, has created a floor under mortgage rates.