Homebuilding in the United States “collapsed” last month while signaling an upcoming potential national housing shortage.
Housing starts, which measures new home construction in the country, fell by 14.8 percent in January 2024 compared to a month back, according to a Feb. 16 press release by the U.S. Census Bureau. This is the largest monthly decline since April 2020. “Housing starts collapsed in January,” said Lawrence Yun, chief economist at National Association of Realtors (NAR). He attributed the decline to “more snow than usual” falling across parts of the country. In addition, “the seasonally adjusted data implies a continuing housing shortage ahead.”
Housing starts are considered to be a key economic indicator measuring the willingness of builders to expend resources on new projects. Builders will start investing only when they expect strong housing demand, suggesting robust consumer sentiment.
Single-family home construction fell by 4.7 percent from the prior month but remained above the key one million unit level, Mr. Yun noted. “Ideally, single-family housing starts would be at 1.2 million, which would measurably help to relieve the housing shortage.”
“Multifamily construction fell 37 percent from a year ago and has been one of the lowest monthly activities over the past decade.”
Mr. Yun pointed out that the United States “greatly underproduced” homes in the decade prior to the COVID-19 pandemic. The shortage resulting from this underproduction is “still lingering” in the marketplace. He suggested incentivizing construction in order to address the shortage issues.
However, some localities are opting for measures like rent control, which he says are wrong policies that will end up raising housing costs and worsen the shortage over the long run.
Housing starts declined on a monthly basis in all four regions across the United States—Northeast, Midwest, South, and West, with the Midwest seeing the largest decline at 30 percent.
Research Group TD Economics pointed out that the January pullback in homebuilding activity in the multi-family segment from December levels “was to be expected” since month-to-month volatility in the segment is common. Housing starts for buildings with five or more units crashed 35.8 percent in January from a month ago.
However, “the segment faces headwinds in the form of high financing costs, slowing rent price growth, and a build-up of projects under construction from the past few years.”
Building permits, seen as a proxy for future construction activities, declined 1.5 percent from December.
“Upward revisions to the December data and an unseasonably cold January help explain the dramatic decline in housing starts to start the year,” said Stuart Paul from Bloomberg Economics.
US Housing Market
The housing market has struggled over the past years amid high mortgage rates, which kept many buyers off the market and made builders wary of making more investments.Between the first week of January 2022 and late October 2023, the average interest rate on a 30-year fixed-rate mortgage more than doubled, from 3.22 percent to 7.79. In recent weeks, rates have dropped to 6.77 percent as of mid-February. However, the mortgage rate still remains far too elevated from where it was a few years ago.
“The economy has been performing well so far this year and rates may stay higher for longer, potentially slowing the spring homebuying season,” Freddie Mac said. “Mortgage applications to buy a home so far in 2024 are down in more than half of all states compared to a year earlier.”
In a recent press release, real estate brokerage Redfin pointed out that the U.S. housing market “lost steam” in January, calling stagnant mortgage rates the “main culprit that took the gas off the housing market pedal.”
Many homeowners are hesitant to sell their properties as a majority have mortgage rates below the current levels, it said. Selling the property means buying a new home at a higher rate.
“A lot of my customers are paying close attention to what the Federal Reserve says. Buyers and sellers came off the sidelines in December when the Fed signaled it would lower interest rates three times in the next year, but now some are getting cold feet because the Fed indicated that rate cuts may come later than expected,” said Hal Bennett, a Redfin Premier real estate agent in Bellevue, WA.
“Inflation and geopolitical conflicts are also scaring some buyers. April, at the absolutely earliest, is when I think things could take off.”
During the four weeks ended Feb. 11, the median U.S. home sale price rose 6.1 percent year over year, Redfin noted. This pushed many “would-be buyers to the sidelines,” it stated.
“We usually have a read on how the market is shaping up by the beginning of February, and the read this year is that it’s looking sluggish so far, mostly because of stubbornly high mortgage rates,” said Chen Zhao, Redfin Economic Research lead.
“Activity should pick up a bit in the spring, partly because it’ll be selling season and partly because people are getting more and more accustomed to elevated rates. We expect mortgage rates to start declining later in the spring as inflation eases and the Federal Reserve finally starts cutting interest rates.”
