NAHB: Home construction stabilizing, inflation improving

Economic data suggests single-family home construction is stabilizing after declines in 2022 while inflation improves.

These incoming trends set an environment where homebuilding will realize monthly gains later in 2023 and will experience an outright gain in 2024, according to National Association of Home Builders Chief Economist Robert Dietz

New home construction is taking on an increasing role because many homeowners with loans well below current mortgage rates are electing to stay put, thus keeping the supply of existing homes for sale at a very low level. In March, 33% of homes listed for sale were new homes in various stages of construction. That share averaged 12.7% from 2000-19. 

With limited available housing inventory, new construction will continue to be a significant part of prospective buyers’ search in the quarters ahead.

The NAHB/Wells Fargo Housing Market Index in May rose five points to 50. It marked the fifth straight month that builder confidence has increased and is the first time that sentiment levels have reached the midpoint mark of 50 since July 2022.

Reflecting the confidence increase, single-family starts increased 1.6% to an 846,000 seasonally adjusted annual rate. However, this remains 28.1% lower than a year ago. In a sign of improving conditions, single-family permits increased to a rate of 855,000 units. They are down 21.2% from a year ago. The pace of single-family permits has improved every month in 2023.

The multifamily sector saw starts increase 3.2% to an annualized 555,000 pace. However, multifamily permits decreased 7.7% to an annualized 561,000 pace. Multifamily permits are down 23% year over year, which indicates a slowdown for apartment construction in 2023. The slow down is due to a tighter lending environment and a near 50-year high of apartments under construction.

Lending standards and availability are going to be a challenge for builders as the year progresses. According to the Federal Reserve’s Senior Loan Officer Opinion Survey, banks tightened standards for all types of commercial real estate loans. For multifamily and construction and land development loans, a substantial net share of banks widened the spread on loan rates, lowered the loan-to-value ratio, increased debt service coverage and decreased maximum loan size. 

Lending standards are higher because of tightening financial conditions from the Federal Reserve’s policy actions. However, current inflation data are consistent with the argument that the Fed should pause and adopt a data-dependent posture.  

Consumer prices in April saw the smallest year-over-year gain since April 2021. This marked the 10th consecutive month of deceleration. It was the first time the rate has fallen below 5% in two years. While the shelter index (housing inflation) experienced its smallest monthly gain since January 2022, it continued to be the largest contributor to the total increase, accounting for more than 60% of the increase in all items less food and energy.

Building material price growth has slowed as well. According to the latest Producer Price Index report, the prices of building materials, in aggregate, decreased 0.2% in April 2023. The index has gained 0.5%, year to date, which is the smallest April YTD increase since 2020. However, some prices continue to rise. Ready-mix concrete prices have risen 1.8%, year to date, and 12.4% over the past 12 months.