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Housing starts fell again in July

For the first time since the start of the pandemic, single-family housing completions were higher than starts

There’s good reason for homebuilder pessimism – housing starts fell again in July, dropping 9.6% from June, according to a report released Tuesday by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.

In July, housing starts dropped to a seasonally adjusted annual rate of 1.446 million. This rate is 8.1% lower than the rate recorded in July 2021, reflecting the decline in homebuilder sentiment.

“The decrease in single-family housing starts mirrors the decline in homebuilder confidence, which turned negative in August, driven by declines in all three components of the index: current single-family home sales, future sales expectations, and traffic of prospective buyers,” Odeta Kushi, First American’s Deputy Chief Economist, said in a statement.

Single-family housing starts dropped 10.1% month over month and 18.5% year over year, to a rate of 916,000. Compared to the month prior, multi-family housing starts were also down, dropping 10.0% to a rate of 514,000, however this is a 17.4% increase from a year prior.

“Construction starts of both single-family and multifamily housing units fell in July. The decline in single-family starts to 916,000 annualized units is the lowest since the COVID-19 lockdown months in the spring of 2020 and essentially matches the annual total of 888,000 in 2019 before the pandemic,” Lawrence Yun, the National Association of Realtor’s chief economist, said in a statement. “The decline in multifamily starts to 530,000 (from 580,000 in the prior month) could be just the normal month-to-month volatility in apartment buildings. What is important is that multifamily construction is on pace this year to reach the highest activity in more than 30 years.”

After months of dealing with construction backlogs, thanks in part to slowing demand, homebuilders were able to make progress with housing completions, which rose 1.1% month over month and 3.5% from a year ago, to a rate of 1.424 million. Single-family housing completions were up a solid 7.0% from July 2021.

“For the first time since June 2020, single-family completions are higher than starts, as builders focus on finishing existing projects, rather than starting new ones,” Kushi said.

Looking ahead, things do not look promising for housing starts in the second half of the year, especially as the number of single-family building permits issued in July dropped 4.3% from June and 11.7% year over year to a rate of 928,000. However, thanks to a 26.2% annual increase in the number of multi-family permits issued, the overall number of building permits rose 1.1% year over year to 1.674 million.

“While builders may respond to the decline in affordability and cooling demand in the purchase market by building fewer single-family homes, it’s possible that they will continue to build more rental units,” Kushi said. “Rents remain elevated, which may incentivize building, despite higher financing costs.”

Despite these challenges, Yun feels there are some reasons to remain optimistic.

“Homebuilders are naturally very cautious about rising unsold inventory during the construction phase,” Yun said. “But those completed homes are finding buyers within three months, which is relatively swift for the new homes market. Improving conditions within the supply chain for the delivery of items such as lumber and appliances will lessen overall uncertainty.”