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 new housing construction 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 2023: Building Permits, Housing Starts, and Completions
The U.S. Census Bureau released its report on new residential construction in the United States revealing important trends and statistics for the month of October 2023. The figures provide insights into building permits, housing starts, and housing completions. These metrics provide valuable insights into the current state of the housing market and offer a glimpse into the future landscape.
The dynamics of the real estate market are undergoing significant shifts as the annual pace of new home construction continues to rise. This surge comes at a crucial time, marked by a historic shortage of housing inventory and the impact of soaring mortgage rates on the housing sector.
Housing Starts Surge by 1.9% in October
According to data released by the Census Bureau, housing starts, a key metric measuring new home construction, experienced a notable 1.9% increase in October compared to the previous month. The seasonally adjusted annual rate reached 1.372 million, surpassing expectations set at 1.35 million. Despite this positive momentum, the number of units started was 4.2% lower than the same period last year, underscoring the complex challenges faced by the housing market.
Building Permits Show Incremental Growth
In tandem with the rise in housing starts, building permits also exhibited a positive trend in October. The permits increased by 1.1% from the revised number in August, reaching a seasonally adjusted annual rate of 1.487 million. However, when compared to the same month in the previous year, permits were 4.4% lower, indicating the lingering impact of challenges within the housing sector.
Insights into Building Permits Data
- Overall Permits: Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 1,487,000.
- Single-Family Authorizations: Single-family authorizations in October stood at a rate of 968,000, showing a 0.5% increase from the revised September figure.
- Multi-Unit Authorizations: Authorizations of units in buildings with five units or more reached a rate of 469,000 in October.
Insights into Housing Starts Data
- Overall Starts: Privately-owned housing starts in October were at a seasonally adjusted annual rate of 1,372,000, marking a 1.9% increase from the revised September estimate.
- Single-Family Starts: Single-family housing starts in October were at a rate of 970,000, showing a marginal 0.2% increase from the revised September figure.
- Multi-Unit Starts: The October rate for units in buildings with five units or more was 382,000.
Insights into Housing Completions Data
- Overall Completions: Privately-owned housing completions in October were at a seasonally adjusted annual rate of 1,410,000, representing a 4.6% decrease from the revised September estimate.
- Single-Family Completions: Single-family housing completions in October were at a rate of 993,000, indicating a 0.9% decrease from the revised September rate.
- Multi-Unit Completions: The October rate for units in buildings with five units or more was 408,000.
The October data on new home construction highlights both positive and challenging aspects of the housing market. While there is a notable increase in construction activities, the year-over-year comparison suggests a broader need for addressing the ongoing issues impacting the industry. It is evident that the demand for new homes persists, underscoring the resilience of the real estate market in the face of various challenges.
As the industry navigates these dynamics, stakeholders must remain vigilant and adaptable to ensure sustainable growth and stability in the new home construction sector.
Home Builder Confidence Falls on Rising Mortgage Rates
The landscape of the housing market is witnessing a rollercoaster of changes, with the most recent blow being a decline in builder sentiment. As the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) reports, November marked the fourth consecutive month of diminishing confidence among builders, reaching a level of 34. This decline, fueled by soaring mortgage rates, has raised concerns, but amidst the challenges, there are glimpses of optimism.
The Numbers Speak: Builder Confidence Hits a Low
The HMI data for November reveals a significant six-point drop in builder confidence, bringing it to its lowest point since December 2022. The cumulative decline of 22 points since July underscores the severity of the situation. Notably, this downtrend occurred despite the majority of data collection preceding the release of the Consumer Price Index, indicating a potential disconnect between builder sentiment and broader economic indicators.
Impact of Rising Interest Rates
The surge in interest rates, peaking at nearly 8% earlier in the month, has cast a shadow on builder views of market conditions. NAHB Chairman Alicia Huey, a seasoned custom home builder, notes that the rate increase since August has priced out a substantial number of potential buyers, contributing to the downward spiral of confidence. Additionally, higher short-term interest rates have heightened financing costs for builders and land developers, exacerbating challenges in an already tight housing supply market.
“While the Federal Reserve is fighting inflation, state and local policymakers could also help by reducing the regulatory burdens on the cost of land development and home building, thereby allowing more attainable housing supply to the market,” suggests Alicia Huey, highlighting the need for a multi-pronged approach to address the prevailing issues.
Ray of Hope: Macroeconomic Indicators
Despite the gloomy builder sentiment, NAHB Chief Economist Robert Dietz points to recent macroeconomic data that signals potential improvements in home construction conditions in the coming months. The 10-year Treasury rate's retreat to the 4.5% range for the first time since late September is seen as a positive development. This move is anticipated to bring mortgage rates close to or below 7.5%, potentially reigniting housing demand and fostering a more favorable outlook for builders.
“In particular, the 10-year Treasury rate moved back to the 4.5% range for the first time since late September, which will help bring mortgage rates close to or below 7.5%,” notes Robert Dietz, emphasizing the potential impact of easing financial conditions on the housing market.
NAHB's Forecast: A Glimpse into the Future
Looking ahead, the NAHB forecasts approximately a 5% increase in single-family starts in 2024 as financial conditions ease with improving inflation data in the months ahead. This projection hints at a potential rebound, offering a ray of hope for the industry amid the current challenges.
Mortgage Rates and Builder Strategies
However, the persistently high mortgage rates, exceeding 7% since mid-August according to Freddie Mac data, continue to pose a hurdle for builders. To stimulate sales, many builders are resorting to price reductions. In November, 36% of builders reported cutting home prices, marking the highest share in this cycle. The average price reduction remained at 6%, indicating the extent to which builders are willing to adjust prices to entice buyers.
Simultaneously, 60% of builders provided various sales incentives in November, albeit slightly down from 62% in October. This reflects the strategic measures adopted by builders to navigate the current market challenges.
Regional Perspectives: Varied Impact on HMI Indices
Breaking down the HMI indices by region provides insights into the varied impact of economic shifts. The Northeast experienced a marginal one-point drop to 49, the Midwest saw a three-point decline to 36, the South faced a substantial seven-point fall to 42, and the West posted a notable six-point decline to 35. These regional nuances highlight the localized challenges and opportunities builders are encountering across the country.
Sources
- https://www.census.gov/
- https://www.nahb.org/news-and-economics/nahb-pressroom
