Housing Now Beginning to Cool Due to Higher Costs

Housing production declined in April due to rising prices and limited availability of lumber and other building materials. Overall housing starts decreased 9.5% to a seasonally adjusted annual rate of 1.57 million units, according to data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Nonetheless, the prior March pace (1.73 million annualized) was the fastest rate for combined single-family and multifamily construction since June 2006.

The April reading of 1.57 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts declined 13.4% to a 1.09 million seasonally adjusted annual rate. The three-month moving average (a useful gauge given recent volatility) fell to 1.14 million starts, as charted below given past month data revisions. Single-family housing starts are up 28% on a year-to-date basis; however, the numbers are distorted by the weak readings of the Spring of 2020.

The multifamily sector, which includes for-rent apartment buildings and condos, was effectively flat at a 482,000 annual rate for 2+ unit construction. After posting a slight decline in 2020, multifamily construction has been strong at the start of 2021, led by gains for suburban multifamily construction.

Builder confidence remains solid in spite of supply-side challenges, according to the NAHB/Wells Fargo Housing Market Index (HMI). However, after peaking at a level of 90 last November, builders report growing concerns over increasing lumber and other construction costs, as well as delays in obtaining building materials. Rising interest rates will also erode housing affordability in 2021, though rates have fallen back in recent weeks. Builders also reporting growing concerns about a more challenging regulatory environment that could limit land development volume. The NAHB forecast includes some weakening for single-family home building at the start of 2021 (off recent highs last Fall), with a return to the long-run post-Great Recession trend as the year progresses. This is consistent with the 3-month moving average data plotted above.

It is also worth noting that the number of single-family homes permitted but not started construction continued to increase in April, rising to 131,000 units. This is 47% higher than a year ago, as building material cost increases and delays slow some home building.

Regionally, thus far in 2021, 57% of single-family construction is occurring in the South. Data from NAHB’s Home Building Geography Index indicate outsized gains for construction within markets with lower regulatory costs and greater access to developable land.

As an indicator of the economic impact of housing, there are now 642,000 single-family homes under construction. This is almost 25% higher than a year ago. There are currently 670,000 apartments under construction, off a post-Great Recession high mark set in August 2020 (683,000) and down slightly from a year ago. Total housing units now under construction (single-family and multifamily combined) is 10% higher than a year ago.

Overall housing permits increased 0.3% in April to a 1.76 million unit annualized rate. Single-family permits declined 3.8% to a 1.15 million unit rate. Multifamily permits increased 8.9% to a 611,000 pace.

Looking at regional permit data compared to the previous month, permits are 8.4% higher in the Northeast, 9.9% lower in the Midwest, 3.9% higher in the South and 4.1% lower in the West.