Homebuilders and developers have adjusted to new reality of higher rates, growth back on track, for single-family since February, for multifamily since August.
By Wolf Richter for WOLF STREET.
Confronted with mortgage rates that make it tough to sell houses at May-2022 prices, homebuilders have adjusted, and in their quarterly reports, have spelled out how: Building smaller houses, “de-amenitizing” the houses (cheaper appliances, countertops, etc.), buying down mortgage rates, and piling on other incentives. Prices of many construction materials have also dropped. As a result, contract sales prices of new houses have dropped by 18% from a year ago, and sales volume has held up, while sales volume of existing homes have collapsed.
So construction starts of single-family houses in November rose by 6.6% from the prior month, to 86,100 starts not seasonally adjusted, when normally in November, construction starts drop.
This big unusual rise for November shows up in the seasonally adjusted annual rate – which adjusts for the typical drop in November: It jumped by 18% month to month, and by 42% from the collapsed levels last November, to an annual rate of 1.143 million starts, the highest since April 2022, according to data from the Census Bureau today.
Note how construction starts plunged starting in the spring half of 2022 as surging mortgage rates began to bite, unsold inventory began to pile up, and homebuilders were pulling back on new projects; and how construction starts bottomed out early this year and then recovered as homebuilders shifted to smaller houses, fewer amenities, and big mortgage-rate buydowns.
Homebuilders sell houses in various stages of construction, from not-started to completed. By completing a house without having sold it – a “spec house” – a homebuilder “speculates” what buyers might want, down to the finishes. Here we’re talking about construction starts of single-family houses, whether or not they have already been sold.
Construction starts of multifamily housing units in buildings with five or more units (such as in condo and apartment buildings) had entered a boom during the pandemic, setting multi-decade highs.
But then the interest-rate shock in late 2022 and in 2023 clobbered Commercial Real Estate – particularly the office and retail sectors which got waylaid by structural shifts, and also the multifamily sector – when soaring mortgage rates could no longer be covered by rents, causing all kinds of fallout, with landlords walking away from properties and lenders – many of them investors, not banks – taking huge losses.
And developers of multifamily properties pulled back, in part due to the difficulty of finding financing for projects whose numbers no longer work out with these higher mortgage rates.
But, but, but… not seasonally adjusted, multifamily construction starts rose to 33,300 housing units (condos and apartments) in November, the highest since July.
Seasonally adjusted, construction starts rose for the third month in a row, after the plunge through August, to an annual rate of 404,000 units, also the highest since July.
Multifamily projects tend to be big with long lead times. High-rise projects where construction started in November were in the planning stages years earlier. So these are long-term trends. But before construction starts, developers can slow down the process, and then they can start construction when they have their ducks all lined up in a row.
In many densely populated urban cores, multifamily is just about the only type of housing that is getting built, and much of it is higher end, because that’s where the money is in expensive cities. Single-family construction takes place further away from urban cores.
Total housing starts, single family and all multifamily, jumped by 14.8% month-to-month, and by 9.3% year-over-year, to a seasonally adjusted annual rate of 1.56 million, the highest since May:
So there “was” a big slowdown in housing starts, for single-family through last year, and for multifamily through the summer, but since then, homebuilders and developers have started to adjust to the new reality of higher rates, and growth is back on track.
And this is what we have seen in other parts of the economy, where consumers and businesses have adjusted to the higher interest rates. And the economy – despite big issues in certain corners, such as CRE debts and CRE property values – has managed to grow at unexpectedly high growth rates, and the most anticipated recession ever, which was supposed to come in 2023, never came. Instead, the economy grew at a red hot pace in Q3; and in Q4, it appears to be tracking at a solid growth rate that is more typical for the US.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.