New housing construction in the United States fell 0.8% in March to a rate of 1.42 million, below economists’ expectations of 1.4 million, due to a slowdown in apartment building, according to the Wall Street Journal. However, the decline in apartment projects was offset by a 2.7% increase in single-family home construction. Despite this, the pace of future construction appears to have slowed. This is because building permits, a key indicator, fell 8.8% to a 1.41 million rate. Permits for buildings with at least five units also declined sharply, by 24.3%, while permits for single-family homes rose 4.1%.
Market conditions
Demand for new homes remains strong, particularly as a shortage of previously owned homes forces buyers to turn to new builds, and builders are optimistic about the future. According to the National Association of Home Builders, new construction has grown to approximately one-third of housing sales, up from one-tenth. Additionally, the decline in housing starts is mainly attributed to a slowdown in the apartment building. As a result, the pipeline of new single-family homes currently under construction has reduced significantly. However, new home inventories became bloated last year, and builders slammed on the brakes in terms of starts. Because of this, home starts are unlikely to improve significantly in the foreseeable future, even if they have bottomed out.
According to the government’s report, single-family-home construction rose the most in the Midwest, with a 23.6% increase. However, the pace of apartment construction fell by 6.7%. The yearly rate of total house starts decreased by 17.2% from the previous year. Thus, reflecting a year-over-year reduction in home starts.
Impact of mortgage rates
While new construction may face headwinds, buyers’ demand for homes is supported by lower mortgage rates. This has driven home purchase intentions in March. However, some economists predict that mortgage rates will rise soon. This is compounding the impact of tighter lending standards as a barrier to homebuilding.
Big picture
After a red-hot building streak, apartment builders are cooling off as new units hit the market. Also, the rent inflation is slowing, indicating that consumers have more options on the supply side. In contrast, a limited supply of single-family homes drives buyers’ demand for new builds. The decline in housing starts and building permits may be due to seasonal factors and ongoing supply chain disruptions, impacting the construction industry.
Despite the decline in housing starting in March, the housing market in the US remains relatively robust. The National Association of Home Builders (NAHB) reported that homebuilder confidence increased to an all-time high in November 2020. A combination of factors buoyed this confidence. This includes low-interest rates, strong demand for housing, and a decrease in lumber prices.
However, the housing market has been hit by various challenges since then. For instance, the ongoing pandemic and its impact on the labor market and supply chains. Additionally, rising material costs, such as lumber and other construction materials, have increased costs for builders and, in turn, higher home prices for buyers.
Despite these challenges, the demand for new homes remains high, particularly in the single-family home market. The shortage of existing homes for sale and low-interest rates have led many buyers to turn to new construction.
The rise in single-family home construction, particularly in the Midwest, is a positive sign for the housing market. It suggests that builders are responding to the demand for new homes, which could help alleviate some of the pressure on the existing home market.
However, the decline in apartment building construction could affect the rental market. While rent inflation has slowed, the supply of new rental units could become constrained if apartment builders continue to slow down their construction efforts.
The housing market will likely continue to face challenges, particularly as the economy recovers from the pandemic. Rising interest rates, supply chain disruptions, and labor shortages could lead to higher costs for builders and buyers alike.
