Housing Market Gets More Bad News

New home construction ‘collapsed’ in January, adding to the struggles in the housing market. It is grappling with low supply that has pushed up prices and made buying a home unaffordable for a lot of Americans who are facing elevated mortgage rates.

Housing starts, which suggests the beginning of building of new homes, fell by close to 15 percent last month, according to the U.S. Census Bureau and U.S. Department of Housing and Urban Development. For the year, they were down by nearly 1 percent.

Housing economists have told Newsweek in the past that the U.S. is down about 4 million homes from where it needs to be to meet demand. The lack of supply of homes has contributed to a rise in prices. With mortgage rates staying high, buyers are finding properties too expensive to purchase.

The decline in housing starts, partly due to a harsh winter, has added to the woes of stifled supply for the market, analysts said.

“Housing starts collapsed in January. More snow than usual fell across parts of the country, but the seasonally adjusted data implies a continuing housing shortage ahead,” Lawrence Yun, chief economist at the National Association of Realtors, said in a note shared with Newsweek. “America greatly underproduced housing in the decade before COVID. That shortage is still lingering in the marketplace.”

However, other housing economists cautioned against reading too much into one-month-worth of data. The numbers were dragged down by the plunge of multifamily units by close to 36 percent in January, while single-family units dropped by about 5 percent, the data showed.

“We need to have more construction. So it’s not good to see starts tumble. That’s not good for the overall housing market,” Danielle Hale, the chief economist at realtor.com, told Newsweek. “But on-permit single family was up pretty [much] across the board.”

Hale was referring to building permits, a more forward-looking metric; for single-family construction, they were up 1.5 percent in January, according to government data.

Builders also had a more optimistic take on Friday’s housing starts numbers, pointing to the fact that single-family construction was up 22 percent from a year ago. The outlook for the year was positive with the expectation that borrowing costs will fall in the coming months as the Federal Reserve cuts rates at some point in 2024.

“Moderating mortgage interest rates in 2024 will ultimately lead to gains for single-family home building this year,” Alicia Huey, chairperson of the National Association of Home Builders (NAHB), said in a statement. “However, tighter lending conditions and higher costs for construction and development loans are holding back some construction at the start of the year.”

Mortgage rates, while down from their 8 percent peak last fall, are still elevated. On Thursday, Freddie Mac said rates ticked up closer to 7 percent. They had been in the mid-6 percent over the last few weeks on the back of economic news that suggested borrowing costs may stay higher for longer.

The Multi-Family Sector Is Struggling

Elevated cost of loans will hurt the multifamily market, which is also struggling due to oversupply at the moment, economists pointed out, as builders chased renters over the last three years.

“Rising apartment vacancy is not due to fewer renters but rather due to the oversupply of construction in the past three years,” Yun said. “Developers are, therefore, pulling back, at least temporarily.”

Other experts said that, where there is more demand in the market, in the single-family segment, the outlook was encouraging based on building permits secured in January.

“Permits are now above 1 million units for the first time since May 2022, when mortgage rates were around 5 [percent],” Yelena Maleyev, KPMG’s senior economist, said in a note.

Going forward, the single family section of the housing market may pick up in 2024.

“The single-family housing market, where there is still a need for supply, will drive any gains in housing construction in 2024,” Nancy Vanden Houten, lead U.S. economist at Oxford Economics, said in a note.

For the multifamily part of the market, it could be a challenging year, Houten added.

“Multifamily starts are more likely to decline or move sideways, since supply in this market, including units still in the pipeline, is more plentiful,” she said. “Tighter lending standards and sluggish rent growth are also likely to weigh on the construction of multifamily homes.”