Posted by John Lohse, CFA
Wednesday, June 21, 2023
Based on data released this week, the domestic housing market for both single and multi-family units had a very strong month in May. This is important because increased construction, especially of multi-family units, should help relieve some pressure on rents, and shelter has been one of the “sticky” components of inflation that has made it harder for the Federal Reserve (Fed) to justify a pivot in the current interest rate hiking cycle.
The U.S. Homebuilder Confidence Index released on Monday improved to an almost one-year high. The monthly report released by the National Association of Home Builders (NAHB) increased to 55, surpassing forecasts of 51. This marks the sixth consecutive month of improvement and the first time above 50 since July 2022. Additional housing data released by the U.S. Census Bureau on Tuesday indicated a monthly uptick in permits for single-family homes, increasing 4.8% from April to May. This could indicate the housing market for new single-family homes is close to a bottom.
While single-family homebuilder sentiment has warmed to positive territory, the year-over-year (YoY) growth rate of private construction spending on multi-family residences continues to massively outpace that of single-family units. As shown in the chart below, the latest U.S. Census Bureau reading on private construction spending saw a YoY increase of 24.9% for multi-family and a decline of 24.7% for single-family.
The level of multi-family units under construction has grown to a point that it has now surpassed that of single-family units, the first time this has occurred since the condo and apartment construction boom of the early 1970s.
Existing home inventories remain scant as owners balk at relinquishing the favorable mortgage rates that were locked in during the period of historically low rates in 2020 to 2021. However, the single-family permits and starts data should provide some solace for homebuyers as they grapple with the affordability challenge of purchasing in today’s market. Demand for condos and apartments from younger generations is strong and should support construction spending in the coming months, with this pipeline of new inventory helping to suppress rent prices, even as early as the end of the year. If we see that materialize it could give the Fed another data point that supports a continued pause, or even a pivot, on the current interest rate hiking cycle.
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