Residential construction slowdown could mean inventory woes in 2023
After remaining relatively stable in the first half of 2022, multifamily builder confidence dropped significantly in Q3.
- Single-family builder confidence has been declining for 11 straight months.
- Housing starts and permits are also down, and credit is tightening.
- If that leads to a slow spring construction season, inventory will become an issue when homebuying demand picks up.
Several new studies are indicating that both single-family and multifamily construction could slow to a crawl next spring, which could mean more inventory and affordability problems when demand picks up.
In a series of reports released this week, economists for the National Association of Home Builders found declining confidence, less activity and worsening credit conditions in the credit industry.
These were some key findings:
Multifamily confidence down significantly
Relative to confidence levels for single-family home construction, which have steadily declined for much of the year in response to rising interest rates, confidence in multifamily construction has been more balanced. The third quarter saw a significant dropoff in confidence, however, even though the number of multifamily units under construction is at its highest level since December 1973. High costs of materials and weakening finance conditions hurting the market going into 2023 are contributing to declining confidence.
Speaking to these monetary factors, NAHB Chief Economist Robert Dietz said "policymakers must seek solutions that create more affordable and attainable housing." Actions to address housing needs would include "a reduction in the pace of the Federal Reserve's rate hikes and reducing regulatory costs associated with land development and home construction," said Dietz.
Fewer single-family homes are planned or under construction
Single-family housing starts were down 4.2% year-over-year in October, according to data the NAHB gathered from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. 2022 is lining up to have the first year-over-year calendar decline in housing starts since 2011, said Dietz.
In addition, the number of single-family building permits issued in September was down 7.4% compared to the previous year, with the steepest drops happening in the Midwest and West regions.
Credit availability is tightening
Credit continued to become less available and generally more costly for developers and builders, according to a recent NAHB survey. Rising interest rates and a reduction in the amount lenders were willing to offer were main factors.
These studies suggest a slow residential construction season this spring. NAHB CEO Jerry Howard recently said in an interview with Yahoo Finance that while there is currently enough new construction inventory, that won't be the case if buyers start reentering the market in large numbers.
"So as soon as demand starts to pick up again, whenever that is, I'm afraid that we're not going to have enough inventory," Howard said. "We're going to be right back where we were. We've always said that we're at least a million housing units short since the Great Recession. And we haven't been able to make up that gap at all. So I'm still saying we're a million housing units short."