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Apartments led rebound in US housing starts

October 18, 2023

US home construction rose in September, led by a pickup in multi-family groundbreakings.

Residential starts increased 7% last month after falling by the most in over a year in August, according to government data released Wednesday. Multi-family dwellings rose more than 17% after also slumping the prior month. The number of units started was 7.2% lower than a year ago.

Applications to build — a proxy for future construction — fell to 1.47 million. Permits to build one-family homes ticked up to the highest level since May 2022, while multi-family authorizations declined to the lowest in nearly three years. Permits were 7.2% lower than a year ago.

Mixed bag

“September numbers were a mixed bag, with starts up and permits down, but both remain low by historical standards, suppressed by high mortgage rates,” said Robert Frick, corporate economist with Navy Federal Credit Union. “Builders continue constructing smaller homes using less land, and offering incentives, but to build our way out of the housing shortage we’ll need mortgage rates well below current levels.”

While the monthly increases partially offset a sizable drop in the prior month, the housing market as a whole remains depressed amid soaring mortgage rates and high prices that are driving affordability down to historically lows.

Though the high-rate environment had initially been beneficial to homebuilders — who saw prospective buyers flee to new construction amid limited resale supply — that’s starting to change. The recent pickup in borrowing costs to the highest level in decades is now discouraging many buyers from house-hunting altogether.

As a result, homebuilder sentiment fell to a nine-month low in October as they grew more pessimistic on current and future sales.

“The drop in building permits and homebuilder sentiment shows how tight financing conditions are constraining the US housing market,” says Bloomberg Economics. “Still, the low inventory of existing homes means builders are better positioned to react to any demand.”

Skittish builders

The National Association of Home Builders/Wells Fargo gauge slid 4 points to 40 this month, marking a third straight decline.

Sentiment and sales have been under pressure for much of the past year because of rising mortgage rates and high home prices. Though many prospective buyers have pursued new construction amid limited resale inventory, the recent surge in mortgage rates to the highest level in two decades risks a broader retrenchment.

“Builders have reported lower levels of buyer traffic, as some buyers, particularly younger ones, are priced out of the market because of higher interest rates,” Alicia Huey, NAHB chair, said in a statement. “Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability.”

Bloomberg and CNN contributed to this report.

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