Home Construction Surges
New Home construction unexpectedly surged in November to a one and a half year high as mortgage rates began to dip and homes for sale remained scarce. The surge could continue with expected further mortgage rate declines and incentives from builders.
“Mortgage rates dropped this month, and it is predicted that rates will continue to decline in 2024,” said Kelly Mangold of RCLCO Real Estate Consulting. “Lower rates increase the affordability of new homes and builders are continuing to ensure they have enough supply ready to meet the pent-up demand from the past few years.”
Also, a report from the Commerce Department on December 19th showed permits for future construction of single-family housing last month increased to the highest level since May 2022.
"American housing demand is permanently higher than before the pandemic since people are spending more time at home," said Bill Adams, chief economist at Comerica Bank in Dallas. "As long-term interest rates fall, builders will add more supply to the housing market to meet that demand, fueling economic growth."
November housing starts rocketed 14.8% which would yield an annualized level of 1.56 million starts compared with October’s 1.36 million annualized rate. Economists, according to U.S. News and World Report, had actually predicted a drop in new housing starts.
The National Association of Home Builders (NAHB) confidence index which measures the optimism/pessimism of home builders rose three points after registering three straight months of decline.
Adding to the optimism of home builders, economists raised their fourth-quarter gross domestic product growth estimates and predicted that the housing market would help the economy avoid a recession next year.
Echoing Kelly Mangold, NAHB chairman Alicia Huey states: “With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic as some prospective buyers who previously felt priced out of the market are taking a second look “With the nation facing a considerable housing shortage, boosting new home production is the best way to ease the affordability crisis, expand housing inventory, and lower inflation.”
Currently, most homeowners hold mortgages below 4% which results in those homeowners staying in their homes rather than selling. This is another important factor propelling home builders to begin new construction – giving the builders confidence that new homes will sell. Kelly Mangold adds, “Rents and home prices have been rising faster than incomes simply because we are not building enough new housing to keep up with demand.”
“Investors have clearly rewarded homebuilders as low inventory of existing homes on the market has created an opportunity for new construction,” said LPL Financial Chief Economist Jeffrey Roach. “Falling mortgage rates also helped ignite demand. Mortgage rates are the lowest since July.”
Breaking down the statistics, new single family home construction rose 18% to 1.14 million starts, annualized. The multifamily sector, which includes apartment buildings and condos, increased 8.9% to an annualized pace of 404,000.
Single-family homebuilding soared in the Northeast, Midwest, and the South. It declined in the West, as California continues to lose population.
The Federal Reserve held interest rates steady in December and policymakers signaled that the historic tightening of monetary policy engineered over the last two years is at an end and lower borrowing costs are coming in 2024.
Permits for new construction, according to Reuters, rose 0.7% to a pace of 976,000 units last month. The strength in housing starts and permits bodes well for residential investment, which rebounded in the third quarter after nine straight quarterly decreases.