HousingWire

Economists attribute the drop in permits to the large amount on new construction inventory currently on the market

Housing completions were yet again the only bright spot in housing starts data released Friday by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD).

In July, privately owned housing starts were at a seasonally adjusted annual rate of 1.238 million units, down 6.8% from June and down 16% compared to a year ago. Single-family starts were down 14.1% month over month and 14.8% on an annual basis to a rate of 851,000 units, while multifamily starts came in at a rate of 363,000, up 11.7% from June, but down 21.8% year over year.

“Both single-family and multifamily housing starts were down significantly from a year ago,” Lisa Sturtevant, the chief economist at Bright MLS, said in a statement. “Compared to June, starts of units in buildings with 5+ units increased while single-family starts declined.”

Overall, homes were completed in July at an annual rate of 1.529 million units, up 9.8% month over month and 13.8% annually. Single-family completions came in at a rate of 1.054 million units up 0.5% from June and 3.6% from a year ago. Although multifamily completions were down 24.4% on a monthly basis to 473,000 units, they were still up 49.2% compared to a year prior.

While the increase in completed new home inventory is good news for many markets with tight housing inventory, economists say it might pose some challenges long-term, but other macroeconomic factors may keep things on track.

“The large inventory of new homes is suppressing building at this point, but with mortgage rates dropping and likely to fall more, we should see a pick up in construction later this year,” Robert Frick, a corporate economist at Navy Federal Credit Union, said in a statement.

The strain on new construction projects is reflected in the drop off in building permits issued in July, which fell to an annual rate of 1.396 million units, down 4% form June and 7% compared to a year prior. The majority of the decline can be attributed to a 12.4% monthly decline and an 18.2% yearly decline in multifamily permits, which were at a rate of 408,000 in July. Single-family permits also declined, falling 0.1% monthly and 1.6% annually to 938,000 units.

“Construction of both single-family and multifamily housing has been strong over the past few years. However, the decline in the number of permits issued for the construction of new housing in July suggests that residential building activity will be cooler in the second half of 2024. Last month, the number of permits issued for the construction of new single-family homes fell 7.0% compared to a year ago, while permits for new multifamily construction was down 12.4%,” Sturtevant said. “Without more homes coming onto the market, housing affordability will continue to be a challenge. There is a structural housing deficit in the U.S., with a housing shortfall of between 1.5 million and 7 million units, depending on what source you look at.”

On a regional level, the Northeast (164,000 starts) posted the sole monthly increase of 42.6%. The South (640,000 starts), the Midwest (171,000 starts) and the West (263,000 starts) posted respective monthly declines of 13.6%, 1.7% and 12.0%.

The same trend occurred on an annual basis, with the Northeast (+45.1%) posting a yearly increase while the South (-20%), Midwest (-1.7%), and the West (-31.9%) recorded decreases.

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CALCULATEDRISK

Housing Starts Decreased to 1.238 million Annual Rate in July

By Bill McBride

From the Census Bureau: 

Housing Starts:
Privately-owned housing starts in July were at a seasonally adjusted annual rate of 1,238,000. This is 6.8 percent below the revised June estimate of 1,329,000 and is 16.0 percent below the July 2023 rate of 1,473,000. Single-family housing starts in July were at a rate of 851,000; this is 14.1 percent below the revised June figure of 991,000. The July rate for units in buildings with five units or more was 363,000.

Building Permits:
Privately-owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 1,396,000. This is 4.0 percent below the revised June rate of 1,454,000 and is 7.0 percent below the July 2023 rate of 1,501,000. Single-family authorizations in July were at a rate of 938,000; this is 0.1 percent below the revised June figure of 939,000. Authorizations of units in buildings with five units or more were at a rate of 408,000 in July.
emphasis added

The first graph shows single and multi-family housing starts since 2000 (including housing bubble).

Multi-family starts (blue, 2+ units) increased in July compared to June. Multi-family starts were down 18.3% year-over-year. Single-family starts (red) decreased in July and were 14.8% year-over-year.

Note that the weakness in 2022 and early 2023 had been in single family starts (red), however the weakness then moved to multi-family – although single family starts have declined recently.

Single family starts only picked up in the Midwest and were down about the same percentage in the South, West and Northeast regions.

The second graph shows single and multi-family starts since 1968. This shows the huge collapse following the housing bubble, and then the eventual recovery – and the recent weakness.

Total housing starts in July were below expectations and starts in May and June were revised down.  A very weak report.

The third graph shows the month-to-month comparison for total starts between 2023 (blue) and 2024 (red).

Total starts were down 16.0% in July compared to July 2023. 

The YoY decline in total starts was due to a sharp YoY decrease in both multi-family and single-family starts. Single family starts had been up YoY for 12 consecutive months, although with the revisions, single-family starts in May were down slightly year-over-year.

Multi-Family Housing Units Under Construction Continue to Decline

The fourth graph shows housing starts under construction, Seasonally Adjusted (SA).

Red is single family units. Currently there are 653 thousand single family units (red) under construction (SA). This was down in July compared to June, and 177 thousand below the pandemic peak in May 2022. Single family units under construction peaked in 2022 since supply chain constraints have eased.

Blue is for 2+ units. Currently there are 886 thousand multi-family units under construction.  This is 135 thousand below the record set in July 2023 of 1,021 thousand. For multi-family, construction delays have been a significant factor, but multi-family units under construction have peaked and will decline significantly in 2024.

Combined, there are 1.539 million units under construction, 172 thousand below the all-time record of 1.711 million set in October 2022.

Comparing Starts and Completions

Below is a graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market and starts are important because that is future new supply (units under construction is also important for employment).

These graphs use a 12-month rolling total for NSA starts and completions.

The blue line is for multifamily starts and the red line is for multifamily completions. Builders are now completing many more multifamily housing units than they are starting on a 12-month basis. Multifamily starts will likely decline further on a rolling 12-month basis, and completions will increase over the next year.

The last graph shows single family starts and completions. It usually only takes about 6 months between starting a single-family home and completion – so the lines are much closer than for multi-family. The blue line is for single family starts and the red line is for single family completions.

Builders are now starting about the same number of single-family homes as they are completing on a 12-month basis.

Conclusions

Total housing starts in July were below expectations and starts in May and June were revised down.  This was a very weak report.

The expected weakness in multi-family starts began last summer, and we should see ongoing weakness in the sector based onless household formation, flat asking rents, rising vacancies, and tighter lending.We saw this coming in the National Multifamily Housing Council’s (NMHC’s) Quarterly Survey of Apartment Market Conditions and in the Architectural Billings Index that showed a decline in multi-family design for the 23rd consecutive month in June.

Single family starts have declined by about 25% over the last 6 months and were especially weak in July. Demand has been weak, and this is likely due to high mortgage rates.

“With current inflation data pointing to interest rate cuts from the Federal Reserve and mortgage rates down markedly in the second week of August, buyer interest and builder sentiment should improve in the months ahead,” said NAHB Chief Economist Robert Dietz.

Note that single-family permits were down only 1.6% year-over-year in July (compared to single-family starts being down 14.8%) so it is likely single-family starts will bounce back in August.