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Home construction rebounds as market still faces supply shortfalls

In this June 24, 2021 photo, lumber is piled at a housing construction site in Middleton, Mass. (AP Photo/Elise Amendola)
In this June 24, 2021 photo, lumber is piled at a housing construction site in Middleton, Mass. (AP Photo/Elise Amendola)
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Housing construction jumped last month after five consecutive monthly declines as higher interest rates, supply backlogs and a labor shortage have hurt the industry’s ability to start projects.

Data released Thursday from the Census Bureau said housing starts rose by 9.8% in February compared to the month prior. Starts, which are a measure of new home construction, were up to a seasonally adjusted rate of 1.45 million from January’s 1.32 million.

The driver of the increase was multifamily starts for projects like apartment buildings, which increased 24% in February. Single-family starts also increased by 1.1%.

“The economic backdrop of rising interest rates and slowing for-purchase market fundamentals have curbed development in the single-family space more so than the multifamily space. It’s likely that multifamily development eventually eases from today’s 40-year high,” said Carl Whitaker, senior director of research and analysis at RealPage. “Even if multifamily demand fundamentals were to deteriorate quickly in the coming few months, there are so many individual properties far enough along in their construction cycle that the realized 2023/2024 supply total will likely remain elevated.”

Home construction has struggled to overcome a series of economic headwinds brought on in the post-pandemic economy. Higher and sometimes volatile mortgage rates that have come with the Federal Reserve’s inflation crackdown have added to the uncertainty as more people are priced out of the market.

The housing market has cooled as buyers saw interest rates on 30-year, fixed rate mortgages climb toward 7% during the last year. Existing home sales have declined for 12 consecutive months, and higher rates have dampened newly built homes compared to a year ago as well.

Sales of new homes increased 7.2% in January from December but were still down 19.4% from a year ago. New builds have helped fill a lack of supply in the existing home market as many people have opted to stay put while they are locked into lower interest rates that aren’t available today. Unlike existing homes, new builds do not require a seller to be willing to give up their low-rate mortgage.

Builder sentiment has improved recently as the industry sees the opportunity to fill a void in the existing homes market. An index kept by the National Association of Home Builders rose for the third consecutive month in March despite the ongoing uncertainties in the economy and shakiness in the banking sector.

We expect volatility in the months ahead as ongoing challenges related to construction material costs and availability continue to act as headwinds on the housing sector,” NAHB chief economist Robert Dietz said. “However, interest rates are expected to stabilize and move lower in the coming months, and this should lead to a sustained rebound for single-family starts in the latter part of 2023.”

There are still issues for builders, but things are also trending better than anticipated in some areas.

While construction delays are a headache for many developers, the degree to which delays are happening isn’t quite as drastic as many expected over the past few years,” Whitaker said.

Getting more houses onto the market is key to addressing an affordability crisis that has made homeownership unachievable for many Americans. Some estimates on the state of America’s housing supply estimate the country is short by as many as 6.5 million homes.

A lack of inventory has been one of the primary drivers of upward home values over the last few years which was exacerbated by intense demand during the pandemic as ultra-low interest rates made monthly mortgage payments affordable for more people.

The median sales price in February was $386,721, according to Redfin. It was a slight decline of 1.2% from the year before, though homeowners in most part of the country are still ahead on equity accumulated during the pandemic boom.

There is really only one way out of a national housing shortage though, and that is to supply more housing units to the market. Even in today’s environment of moderating housing demand, the supply shortfall remains significant.

A lack of affordable housing has also received attention from the White House, which has taken steps to expand access to homeownership and encourage local governments to enact regulations to help spur development.

“Ultimately though, the real housing crunch is within the affordable space. Once more, that’s an issue only solved by providing new supply to the market,” Whitaker said. “Solving that issue is very complex and will require a lot of cooperation and collaboration between cities and their residents, coupled with support from broader government initiatives.”

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