The housing market continues to face considerable headwinds from rising interest rates and interruptions in the building material supply chain, which boost construction costs. Housing Starts refer to the number of new residential construction projects that have begun during any particular month. Estimates of housing starts include units in structures being rebuilt on an existing foundation.
Building permits, on the other hand, are issued by local governments to allow builders to begin the construction of a new home or to make significant renovations to an existing home. Building permits are usually required for any new construction or remodeling that involves changes to the structural or mechanical systems of a home.
Housing construction refers to the actual building of the residential structure, which includes everything from laying the foundation to framing the walls, installing electrical and plumbing systems, and finishing the interior and exterior of the building.
The sequence of events typically goes as follows:
A builder obtains a building permit from the local government, which allows them to start construction on a new housing unit.
Once construction begins, it is counted as a housing start. The construction process continues until the housing unit is completed and ready for occupancy, at which point it is considered part of the housing stock.
So, building permits come first, followed by housing starts, and then housing construction. However, it is important to note that not all permits lead to starts and not all starts to lead to completed construction. Some permits may expire before construction begins, and some starts may be delayed or canceled due to various reasons such as changes in market conditions or financing issues.
New Construction Update: Building Permits, Housing Starts, and Completions
The U.S. Census Bureau released its report on new housing construction, permits, and housing starts for March 2023, revealing a mixed picture of the housing market. Here are the key takeaways:
Building permits are a key indicator of future housing starts. In March, privately-owned housing units authorized by building permits were at a seasonally adjusted annual rate of 1,413,000. This represents a decline of 8.8% from the revised February rate of 1,550,000 and a 24.8% decrease from the March 2022 rate of 1,879,000. However, single-family authorizations in March were at a rate of 818,000, which is 4.1% above the revised February figure of 786,000. Authorizations of units in buildings with five units or more were at a rate of 543,000 in March.
Housing starts refer to the beginning of construction on new housing units. In March, privately-owned housing starts were at a seasonally adjusted annual rate of 1,420,000. This is a 0.8% decline from the revised February estimate of 1,432,000 and a 17.2% decrease from the March 2022 rate of 1,716,000. Single-family housing starts in March were at a rate of 861,000, which is 2.7% above the revised February figure of 838,000. The March rate for units in buildings with five units or more was 542,000.
Housing completions refer to the completion of new housing units. In March, privately-owned housing completions were at a seasonally adjusted annual rate of 1,542,000. This is a 0.6% decline from the revised February estimate of 1,552,000, but it is a 12.9% increase from the March 2022 rate of 1,366,000. Single-family housing completions in March were at a rate of 1,050,000, which is 2.4% above the revised February rate of 1,025,000. The March rate for units in buildings with five units or more was 484,000.
The decline in building permits and housing starts in March may indicate a slowing in the housing market, but the increase in single-family authorizations and starts may suggest that builders are focusing on meeting the demand for single-family homes. Housing completions also showed an increase from the same period last year, which could help boost inventory levels.
The decline in building permits may be a result of rising construction costs and supply chain disruptions, which have made it difficult for builders to obtain materials and labor. Despite these challenges, builders remain optimistic about the future of the housing market, as mortgage rates continue to trend lower and the economy shows signs of improvement.
Spring is traditionally a busy time for home sales, and builders may look to increase their inventory in the coming months to capture buyers who have been sidelined over the past year but are now looking to enter the market. Overall, while the housing market is facing some headwinds, there are also reasons for optimism, and the coming months will be crucial in determining the direction of the market.
Home Building Sentiment 2023
The National Association of Home Builders (NAHB) released its latest Home Building Sentiment report in April, which showed a one-point increase in builder confidence in the market for newly-built single-family homes, bringing the Housing Market Index (HMI) to 45.
The report highlighted the ongoing challenges in the industry, including limited resale inventory and building material shortages, but also indicated a positive trend for new home sales.
The increase in the HMI index gauging current sales conditions and sales expectations is a positive sign for the industry, and the regional HMI scores suggest an overall positive trend in the housing market sentiment.
Lack of Existing Inventory Supports New Home Market
Builders have remained cautiously optimistic due to the limited resale inventory, which has helped to increase demand in the new home market. Despite elevated interest rates, the lack of resale inventory has led to a surge in new home sales. Currently, one-third of the housing inventory is new construction, compared to the historical norms of a little over 10%. Builders note that additional declines in mortgage rates, to below 6%, would further price-in demand for housing.
Building Material Issues Continue to Plague the Industry
The industry continues to grapple with building material issues, including a lack of access to electrical transformer equipment. The shortage of building materials has led to higher prices and longer wait times for construction projects, leading to increased pressure on the industry. However, builders are using sales incentives to bolster sales, and the share of builders reducing home prices continues to trend down.
NAHB/Wells Fargo Housing Market Index (HMI)
The HMI survey, which has been conducted monthly for more than 35 years, gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair,” or “poor.” The survey also asks builders to rate the traffic of prospective buyers as “high to very high,” “average,” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
Current Sales Conditions and Sales Expectations
The HMI index gauging current sales conditions in April rose two points to 51, and the component charting sales expectations in the next six months increased three points to 50. This marks the first time these components both returned to the 50+ range since June 2022. The gauge measuring the traffic of prospective buyers remained unchanged at 31. This is the first time the traffic component failed to improve in 2023.
Regional HMI Scores
Looking at the three-month moving averages for regional HMI scores, the Northeast rose four points to 46, the Midwest edged up two points to 37, the South increased four points to 49, and the West moved four points higher to 38. These regional scores indicate a positive trend in the overall housing market sentiment.