Kiplinger Housing Outlook: Multifamily Construction Starts the Year on Weak Footing

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Home price growth accelerated again in December but at a slower pace.  The S&P CoreLogic Case-Shiller National Home Price Index, which measures the prices of existing homes across the nation, rose 5.5% from a year earlier, up from a 5% gain the previous month. On a month-over-month, seasonally adjusted basis, home prices rose 0.2% — the 11th consecutive increase. The monthly increase was the same as in the previous month, but much lower than the 0.6% and 0.5% gains in September and October. Looking ahead, the inventory of existing homes will stay tight, which will push home prices higher as demand partially recovers from last year on the back of modestly lower borrowing costs.

Residential construction plummeted at the start of 2024. Total housing starts fell 14.8%, to 1.33 million annualized units in January — the largest monthly drop since April 2020. Single-family starts fell 4.7%, while multifamily starts declined 35.6% during the month. Single-family permits rose 1.6% from the previous month, while multifamily permits fell 7.9%. The modest gain in single-family permits over the past few months and the recent jump in builder confidence suggest that single-family construction will continue to gradually increase in the coming months. Builders are expecting a steady stream of buyers from the existing home market, where inventory is much tighter.  

Meanwhile, multifamily developers look to be hitting the brakes amid more restrictive credit conditions and softer apartment-market demand. Apartment vacancy rates have turned higher over the past year as demand has continued to normalize and the supply of new multifamily developments has continued to increase. Multifamily developers are likely to focus this year on completing units under construction rather than breaking ground on new developments. 

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New home sales ended the year on a high note. They rose 1.5% in January to a seasonally adjusted annual rate of 661,000 units. Sales rose in the Northeast, the Midwest and the West, and fell in the South. A recent recovery in home-buyer sentiment and mortgage applications for new-home purchases have contributed to rising optimism among home builders about the spring selling season. The median price of a new home rose 1.8% in January from the previous month, but it’s still down on an annual basis. The glut of new homes should weigh on price growth, even as builders are pulling back on offering buyer incentives and price cuts, according to a recent survey conducted by the National Association of Home Builders. The low inventory of existing homes means that demand for newly built homes will stay robust in 2024. 

Existing home sales rose in January, due in part to lower mortgage rates. Sales of previously owned homes rose 3.1%, to 4 million annualized units in January. That increase was the largest monthly gain since February 2023. The rise largely reflects the fall in mortgage rates across November and December, which brought more buyers and sellers into the market. Relatively low sales levels show that affordability concerns continue to weigh on demand for existing homes. The fact that existing 30-year fixed-rate mortgages average just 4% shows that most homeowners locked in a rate much lower than what’s available on new loans now. Meanwhile, the inventory of existing homes on the market fell 11.5% from a year ago. This translates to three months of supply at the current sales pace, down from 3.1 months in December. Inventory will increase slightly over the next few months as falling mortgage rates entice more homeowners to put their homes on the market. But even so, it’s going to remain a seller’s market. 

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