Multi-unit home construction down, but more homes of all sorts available now

One headwind in an otherwise strong US economy has been higher interest rates in 2024 and the industries that are being held back as a result. And that's clear when you look at the lack of new projects in home construction.

Housing starts, another name for new home construction, slipped 0.5% in September on falling multifamily starts. Single-family starts moved higher. All regions besides the Northeast reported fewer starts overall.

Single-family starts rose 2.7% in September after August starts were revised up to one million. Starts have trended above one million for eight of the last 11 months. Builders pivoted back to single-family construction in late 2023 after a slump that began in late 2022, but continue to hit the one million-unit speed limit. Larger builders have been able to offer mortgage rate buydowns and other incentives to help sidelined buyers. According to the National Association of Home Builders (NAHB), about 62% of builders were offering sales incentives in October, up slightly from September.

Mortgage rates have not fallen as much as potential buyers had hoped this month, but they have remained below 7% since June. Falling mortgage rates have motivated more refinancing activity rather than new home purchases. Some potential buyers are still holding out with the expectation that rates will go lower. However, the 30-year, fixed-rate mortgage ticked back up to 6.4% in mid-October; refinancing activity slumped on the news.

Starts for multifamily (five units or more) buildings dropped 4.5% in September, which translated to a 15.7% annual drop. As more multifamily units are completed, builders are holding back from starting new projects. Multifamily units under construction have fallen from a record high of one million back in 2023 to 825K in September. The current completion rate is the highest since the early 1970s, but the pipeline is drying up. All the supply coming on line is helping alleviate rental costs in many markets, but the reprieve will be short-lived because the number of building permits issued is falling.

The difference between the high number of completions and units currently under construction is stark over the last 12 months, especially in the multi-family complexes of 5 or more units. Completions have been in an uptrend in America, up 14.6% from September 2023 to September 2024. Interestingly, much of that growth is in multi-units as well, so what we’re seeing in new single-family home construction is relatively steady.

We also got mixed messages on the sales side, as new residential home sales were reported later this week as reaching its highest levels since May 2023, and the second highest level since early 2022, right before the Federal Reserve began their anti-inflation rate hikes. But the National Association of Realtors reported this week that the rate of existing home sales dropped to their lowest amounts since the COVID shutdowns of early 2020, and down more than 40% from where it was 2 years ago.

I also note the NAR report says that home price increases nationwide have leveled off, and are only 3% year-over-year.

By comparison, Wisconsin’s housing market has continued to see larger price increases – up nearly 6% year-over-year for September 2024. But we also had the lowest amount of September sales in 12 years, indicating that more inventory would be nice, as the Wisconsin Realtors Association says that things are still not in balance between buyers and sellers.

Although both total listings and new listings rose in September indicating a slight improvement in inventory levels, the housing market remained tight. With just 3.8 months of available supply, the existing home market continued to signal a strong seller’s advantage, with supply well below the six-month benchmark that indicates a balanced housing market.

In a positive sign, the WRA says that the 100+ point decline in mortgage interest rates and higher incomes made homes more affordable to Wisconsinites than in September 2023, even with the 6% increase in median prices. And perhaps the drop in interest rates will encourage more homes to be put onto the market, as many homeowners have likely been locked in place with a low-interest mortgage that predates 2022, and no reason to look for another home with higher prices and higher rates.

So with that in mind, the question becomes whether the big increase in home completions is going to boost inventory enough to level off prices, and the lower interest rates also can help free up some availability. But will it be too late to head off a decline in home construction employment that the drop in permits and homes under construction seems to portend? Tough call.