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: 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 December 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.
In December, there was a 4.3% drop in housing starts compared to the previous month's surge of 11%, but still 7.6% higher than the same period last year. The reported 1.46 million annual rate exceeded analysts' expectations, indicating a positive trend in the housing market.
Despite the dip in December, the housing market is showing resilience, with figures remaining near pre-pandemic levels. Analysts interpret the drop as a temporary setback following a substantial increase in the prior month. This suggests an overall positive trajectory for the housing market, signaling potential improvements in the future.
The optimism in the housing market is bolstered by declining mortgage rates, dropping to 6.7% from 7.8% in October. Homebuilder sentiment has seen a consecutive monthly increase, and industry executives predict a favorable market in recent earnings calls. These factors contribute to a positive outlook for the construction sector.
Building permit figures, considered a crucial indicator of future construction, demonstrate sustained confidence among homebuilders. In December, building permits reached a 1.5 million annual rate, surpassing the forecast of 1.48 million and marking a 1.9% increase from the previous month. This further supports the notion of ongoing construction activity and growth in the housing sector.
Building Permit Details:
- Total Permits: Privately-owned housing units authorized by building permits reached a rate of 1,495,000, exceeding the revised November rate by 1.9%.
- Single-Family Authorizations: The rate for single-family authorizations in December was 994,000, indicating a 1.7% increase from the revised November figure.
- Units in Buildings with Five or More Units: Authorizations for units in buildings with five or more units reached a rate of 449,000 in December.
Housing Starts Details:
- Total Starts: Privately-owned housing starts in December were reported at a rate of 1,460,000, representing a 4.3% decrease from the revised November estimate.
- Single-Family Starts: The rate for single-family housing starts in December was 1,027,000, showing an 8.6% decrease from the revised November figure.
- Units in Buildings with Five or More Units: The December rate for units in buildings with five or more units was 417,000.
Housing Completions Details:
- Total Completions: Privately-owned housing completions in December reached a rate of 1,574,000, marking an 8.7% increase from the revised November estimate.
- Single-Family Completions: The rate for single-family housing completions in December was 1,056,000, showing an 8.4% increase from the revised November rate.
- Units in Buildings with Five or More Units: The December rate for units in buildings with five or more units was 509,000.
Building Permits: In 2023, an estimated 1,469,800 housing units were authorized by building permits, representing an 11.7% decrease from the 2022 figure of 1,665,100.
Housing Starts: In 2023, an estimated 1,413,100 housing units were started, marking a 9.0% decrease from the 2022 figure of 1,552,600.
Housing Completions: In 2023, an estimated 1,452,500 housing units were completed, reflecting a 4.5% increase from the 2022 figure of 1,390,500.
Overall, the construction sector is navigating through fluctuations with a positive trajectory, supported by robust building permit rates and optimistic market indicators.
Home Builder Sentiment Surges: Impact of Falling Interest Rates
Positive Trends in Builder Confidence
Recent developments in the housing market have seen a notable surge in builder confidence, thanks to a significant drop in mortgage rates. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) reported a remarkable seven-point increase in builder confidence, reaching 44 in January. This encouraging trend marks the second consecutive monthly rise, aligning closely with the period of falling interest rates.
Driving Factors: Lower Interest Rates
Chairman of NAHB, Alicia Huey, emphasizes the impact of lower interest rates on housing affordability. Lower rates have lured buyers back into the market, reigniting activity that was somewhat subdued in the previous months due to higher borrowing costs. Huey, a custom home builder and developer from Birmingham, Ala, anticipates a growth in single-family starts in 2024, contributing essential inventory to the housing market.
Challenges on the Horizon
Despite the optimistic outlook, builders are not without challenges. Factors such as building material cost and availability, as well as lot supply, pose potential hurdles. NAHB Chief Economist, Robert Dietz, notes that as home building expands in 2024, the market will face growing supply-side challenges in the form of higher prices and/or shortages of lumber, lots, and labor.
Home Price Adjustments
Even with mortgage rates falling below 7% in the past month, a considerable number of builders are adjusting their strategies to boost sales. In January, 31% of builders reported cutting home prices, a decrease from the previous two months and the lowest rate since last August. The average price reduction remained at 6%, unchanged from the previous month.
Sales Incentives: Stability in Strategy
Interestingly, despite the changes in home prices, the use of sales incentives has remained relatively stable. In January, 62% of builders provided sales incentives of various forms. This share has been consistent, ranging between 60% and 62% since October.
Gauging Builder Perceptions
The NAHB/Wells Fargo HMI, derived from a monthly survey spanning over 35 years, gauges builder perceptions of current single-family home sales and sales expectations for the next six months. The survey classifies responses as “good,” “fair,” or “poor,” providing valuable insights into the industry's sentiments.
Positive Trends in HMI Indices
All three major HMI indices witnessed gains in January. The index charting current sales conditions increased by seven points to 48, the component measuring sales expectations in the next six months jumped 12 points to 57, and the component gauging traffic of prospective buyers rose five points to 29.
Regional Variances in HMI Scores
Examining the three-month moving averages for regional HMI scores, the Northeast increased four points to 55, the South increased two points to 41, the West registered a one-point gain to 32, and the Midwest held steady at 34.
As the housing market enters a new phase in 2024, driven by lower interest rates, builder sentiment is on the rise. The positive indicators in builder confidence, coupled with insights from the NAHB/Wells Fargo HMI, paint a promising picture for the industry. However, builders must navigate challenges such as material costs and supply shortages, underscoring the dynamic nature of the housing market.