March saw a significant decline in single-family home construction, intensifying challenges in the U.S. housing market due to rising mortgage rates and a shrinking supply.
Single-family homebuilding experienced a sharp decline in March, according to a report released by the Commerce Department on Tuesday. This downturn comes despite the pressing need for more housing, as evidenced by a severe shortage of previously owned homes for sale. The slowdown is partly attributed to a resurgence in mortgage rates, which has discouraged potential buyers.
Single-family housing starts, the primary measure of homebuilding, fell by 12.4% to a seasonally adjusted annual rate of 1.022 million units last month. This decline was in stark contrast to February's revised figures, which showed an increase to a rate of 1.167 million units. While year-on-year figures for March indicated a 21.2% increase in single-family homebuilding, the resurgence in the housing market seems to be waning.
Christopher Rupkey, the chief economist at FWDBONDS, commented on the situation, stating, "The housing recovery has stalled for now as home builder expectations of sharply lower interest rates this year have faded." He also warned of the implications for affordability, saying, "One thing is for certain, and that is home prices are going to be on an upward, more unaffordable trend without more supply."
The housing market had shown signs of recovery with residential investment bouncing back in the second half of 2023 after contracting for nine consecutive quarters. However, the latest data suggests that this recovery is losing momentum, with single-family building permits—a precursor to future construction—falling to a five-month low.
The National Association of Home Builders (NAHB) noted that confidence among builders remained unchanged at an eight-month high in April, but cautioned that "buyers are hesitating until they can better gauge where interest rates are headed."
Interest rates, especially for the popular 30-year fixed-rate mortgage, appear to be climbing towards 7%, as per data from mortgage finance agency Freddie Mac. This rise is fueled by strong labor market and inflation reports, leading to speculation that the Federal Reserve might delay any anticipated rate cuts this year. The Fed has maintained its policy rate between 5.25% and 5.50% since July, after raising the benchmark overnight interest rate by 525 basis points since March of 2022.
In the Northeast, Midwest, and the densely populated South, single-family homebuilding dropped, though it rose in the West. The overall housing starts plummeted by 14.7%, marking the most significant drop since April 2020, with a rate of 1.321 million units in March. Permits for future construction also declined, with permits for single-family homes falling by 5.7% to a rate of 973,000 units, the lowest level since October.
The backlog of single-family homes approved for construction but not yet started increased slightly by 0.7% to 273,000 units, while the number of single-family housing units under construction saw a marginal increase. In contrast, the stock of multi-family housing under construction decreased by 1.8%.
Realtors have estimated that to bridge the inventory gap, housing starts and completion rates need to be between 1.5 million to 1.6 million units per month over time. However, current figures show that the industry is falling short of this target.
The U.S. housing market is facing challenges with rising mortgage rates and a decline in homebuilding activity, which could have broader implications for affordability and availability of housing in the country.
