Nancy Vanden Houten, Senior Economist, Oxford Economics.
Illustration by Lanette Behiry/Real Estate News

Housing Market Decoded: Where is inventory headed? What housing starts reveal 

New construction homes and multifamily housing are on different tracks. Here’s why that matters, and what’s coming in the next year.

September 2, 2023
5 minutes

Decisions in residential real estate are often based on market data — sometimes conflicting, often confusing. Housing Market Decoded, authored by economists and other market experts, helps put the data in context so you can make sense of the numbers.

Housing starts are an important indicator of future inventory, and in a market where inventory remains severely constrained, many people have their eyes on the new construction sector. But a closer look at housing starts reveals two markets with different trajectories.

Overall U.S. housing starts bottomed out in early 2023 and have been trending higher over the first seven months of this year. But a combination of a mild recession, higher interest rates and tighter bank lending standards is expected to weigh on housing activity as 2023 winds down.

As a result, new home construction will again weaken by the end of the year, hitting another low in early 2024 and then staging a modest recovery.

Single-family, multifamily construction on different tracks

It's important to note, however, that forecasting new home construction means predicting the behavior of two different markets: single-family homes, which consists of detached homes and townhouses, and multifamily homes, which includes buildings with two or more apartments, although this category is dominated by buildings with five or more apartments.

The two sectors have moved on different tracks since the start of 2022 when single-family starts began a steady descent that lasted until early this year, while multifamily starts mostly moved sideways before edging lower more recently.

Through the rest of the year, declines in multifamily starts will likely account for most of the weakening expected in total housing starts — although the most recent surge in mortgage rates, which has dealt a blow to homebuying affordability, dampens the outlook for single-family home construction as well.

More factors working against multifamily construction

Why do we expect more weakness in multifamily housing?

Several factors are at work. First, because multifamily construction has been more resilient in recent years, supply has kept better pace with demand compared to the single-family sector, and more units are in the pipeline. In July, a record 1 million units were under construction.

After a surge early in the pandemic, demand for multifamily housing has subsided, which is apparent in both rising vacancy rates — still low by historical standards — and dramatically slower rent growth.

More restrictive lending standards following bank failures earlier this year will also have a disproportionate affect; the tightening in lending standards for multifamily construction loans is the most severe since the Great Recession.

Single-family supply has not kept pace with demand

The supply and demand dynamics in the single-family market are quite different. Construction of single-family homes recovered only gradually following the Great Recession; only in 2021 did starts reach 1.1 million, the average pace in the 1990s prior to the boom in the early 2000s, when, arguably, overbuilding occurred.

As a result, the increase in the supply of new single-family homes has failed to keep pace with household formation and homes lost due to demolition, natural disasters or conversions to other uses.

Separately, the supply of existing homes for sale has been chronically tight for years. Homeowners have opted not to resell their homes for a variety of reasons, including a lack of affordable trade-up options in the new home market and a general decline in mobility, including among older homeowners who are choosing to age in place.

Following the rapid spike in mortgage rates that started in 2022, pricing millions of households out of the homebuying market, builders initially cut back on starts of single-family homes, which fell more than 25% over the course of 2022.

New single-family homes account for a sizable share of the market

As mortgage rates declined toward the end of 2022, single-family starts began to rebound, but another phenomenon was also at work: The supply of existing homes for sale contracted as would-be sellers with low mortgage rates retreated to the sidelines. At the end of Q1, just over 80% of outstanding home mortgages had rates below at or below 5% compared to the current rate for a 30-year loan of more than 7%.

So to some degree, new homes have been filling a void created by a dearth of existing homes for sale. In the first half of 2023, new homes accounted for 15% of total home sales, up from an average of 11% in the prior 10 years, and new homes accounted for 33% of the supply of single-family homes for sale, nearly double the average of the prior 10 years of 17%.

Homebuilders also offered buyers a variety of incentives, including price reductions and mortgage rate buydowns. As demand from buyers who might normally purchase an existing home increased, many incentives were scaled back this past spring.

But builders, who largely continue to be profitable, will likely scale up those incentives again, particularly if mortgage rates remain above 7%.

Nancy Vanden Houten is a Lead U.S. Economist at Oxford Economics, where she covers the housing market, the labor market and fiscal policy. Prior to joining Oxford Economics in 2016, she was an economist at Stone & McCarthy Research Associates and at Merrill Lynch. The views expressed in this column are solely those of the author.

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