Rebecca Noble/Bloomberg
Surging interest rates and building costs in 2022 led single-family construction to plummet by the first quarter of this year, while the multifamily sector experienced growth, the National Association of Home Builders said.
All types of markets measured in NAHB’s newly released Home Building Geography Index saw single-family building continue to decelerate in the first quarter to varying degrees, prolonging their fall since the start of 2022. The trade group’s moving average growth rate is determined based on the past five quarters of activity.
“The latest findings illustrate that labor shortages, supply shortages and higher mortgage rates continue to hamper the industry, particularly the single-family market: Single-family home building experienced negative growth rates in all submarkets,” the NAHB said.
The pace of construction in core-county large metros decreased the most, at 25.6% compared to 16% in the fourth quarter and a positive growth rate of 7.9% a year ago.
Large metropolitan areas in suburban counties followed with a drop of 23.7%, reflecting further slowing from 16.3% three months earlier, while a year ago activity had increased by 5.4%. Meanwhile, growth diminished by 22.7%, compared to 12.1% in the fourth quarter, within similarly sized metros of outlying counties. The submarket also experienced the largest year-over-year reversal after numbers surged by 17.4% a year ago.
Small metropolitan communities also saw slowdowns by double-digit percentages. Single-family construction within small metros of core and outlying counties dipped 22.1% and 19.4% in the first quarter, respectively, compared to 14% and 11.7% three months earlier, and positive growth of 10.5% and 13.5% a year ago.
Single-family home building in micro and rural counties likewise dropped by 2.9% and 8.3%. In the fourth quarter, the rate of single-family construction in micro counties had grown by 6.8% but fell 1% in nonmetro communities. The latest quarterly numbers are down from positive growth of 15.4% and 18.9% last year.
Single-family construction in large metro areas also fell to a 49.7% share relative to total activity, suggesting that builders continue to see potential in smaller markets after the pandemic-fueled housing boom.
The decline seen in NAHB’s latest index comes even as data from the homebuilding industry shows some hints of a rebound emerging in 2023. Single-family housing starts, as well as permits, rose in the past few months this year, as scarce existing-home inventory led more consumers to consider purchases of new units.
The early-year increase in numbers thus far has also led to an upswing in homebuilder sentiment, after it darkened consistently throughout 2022. NAHB’s latest gauge of industry sentiment came in higher for the fifth month in a row in May, reaching a neutral mark of 50 on its 100-point scale since July last year.
But the single-family construction industry is likely to face ongoing economic pressures that could blunt current momentum, according to housing researchers.
“We continue to expect the economic backdrop to weaken, and many smaller homebuilders are likely facing tighter construction loan credit amid the fallout from recent banking turmoil,” said Fannie Mae Chief Economist Doug Duncan in a recent research statement.
Duncan also said a resurgence of interest rates cannot be ruled out. “If this occurs, we believe the current strain on affordability could worsen and work to suppress future demand.”
But the multifamily segment told a different story. Although growth slowed over the past 12 months, activity was still up across all submarkets in the past year, according to the homebuilding geography index. The smallest annual pace of growth showed up within large metro areas of core counties at 3.2%. But multifamily activity in the same-sized markets in suburban and outlying counties surged 8.5% and 24.5%.
Among small metropolitan communities, multifamily building grew 11.5% and 13.2% in core and outlying counties.
Meanwhile, construction in metro and nonmetro areas of rural micro counties accelerated 20.2% and 19.1%.
But as in the single-family segment, multifamily builders are confronting economic headwinds likely to slow annual growth by 14% in 2023, according to recent data from the Mortgage Bankers Association.
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