“The I’s Have It: Interest, Inflation and Inventory”

2022 ended with a decline in single family starts for the first time since 2011. This according to the National Association of Home Builders (NAHB) summary published in January of 2023. Recent data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau indicate that overall housing starts decreased 1.4% year-over-year, or 1.38 million units in 2022. This trend continued into 2023 particularly in single family starts declining 4.3% month over moth to a seasonally adjusted annually rate of 941,000 units in August of 2023. This decrease is primarily attributable to the decline in multi-family production. The multi-family sector includes two or more units such as condos and for-rent apartments. As a result, multi-family starts were down 19% at the end of 2022. The Census Bureau estimated that multifamily starts averaged 552,000 units annualized in the first quarter of 2023 and expected to end the year at a decrease of 6.4% compared to 2022. Looking at the trends on the charts below, builder confidence decreased rapidly which correlates strongly to the decrease in construction starts. However, the chart detailing the houses under construction shows a steady peak going into 2023.

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Two of the main drivers for the decline in construction starts are rising mortgage interest rates and increased construction costs over the years. The current state of the economy is intriguing considering the number of dollars being spent is moderately growing while costs are significantly higher than in years past. As of October 19, 2023, the 30-year fixed-rate mortgage reached its highest level since 2000, at a rate of 7.63%  according to Freddie Mac[TS1] . Experts believe this trend will continue in step with the economic engine continuing to run hot for the foreseeable future. The combination of high-interest rates and increasing prices affect affordability for many homebuyers. The median existing-home sales price also hit a record high of $413,800 in 2023, the second highest price ever recorded according to the National Association of Realtors[TS2] . Despite high mortgage rates, the market remains competitive because of the dearth in existing-home and multi-home inventories. These and other factors form an intriguing dilemma for home buyers and home builders alike.

The 2024 outlook is uncertain to say the least, however many believe non-residential construction will shrink as the economy slows sometime in the next year or so according to Forbes. Some positive signs conflict with this as the employment for non-residential construction is increasing according to the National Bureau of Labor Statistics. Because of this, many believe the inventory shortage will continue to be an issue leading into 2024, which means housing prices are likely to remain high.

 [TS1]https://www.freddiemac.com/pmms

[TS2]https://www.forbes.com/advisor/mortgages/real-estate/housing-market-predictions/