All the arrows are pointing to an even stronger housing market in 2024 than many had expected, and this prospect is streaming through all manner of indicators, from builder confidence to buyer motivation. And this beyond the fact that interest rates have barely moved; the widespread enthusiasm is driven by the promise of three interest rate cuts in 2024 which the Federal Reserve has signaled over and over again in the last few months.
The National Association of Home Builders released a report recently that underscores the strength in housing starts, despite persistently high mortgage interest rates. The logic here is that home buyers will be able to finance home purchases with adjustable-rate mortgages that will assure their rates will lower as the Fed does the same. While the days of mortgages in the 3 percent range are clearly gone, probably forever excepting another pandemic or financial crisis, the expectations that rates will fall into the 4 percent range are probably realistic.
The NAHB reports that pent-up demand, moderating interest rates, and a lack of existing inventory helped push single-family starts in February to their highest level since April 2022. Overall housing starts increased 10.7 percent in February to a seasonally adjusted annual rate of 1.52 million units, according to figures from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.
The February reading of 1.52 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts increased 11.6 percent to a 1.13 million seasonally adjusted annual rate. Single-family starts are also up 35.2 percent compared to a year ago. The three-month moving average, a useful gauge given recent volatility, is up to over 1.0 million starts.
The multifamily sector, which includes apartment buildings and condominiums, increased 8.3 percent to an annualized 392,000 pace for two-plus unit construction in February. The three-month moving average for multifamily construction has been trending up to a 419,000-unit annual rate. But on a year-over-year basis, it is important to note that multifamily construction is down 34.8 percent, so this segment has some catching up to do.
On a regional basis, the report confirms a trend we have been tracking for some time now: the Midwest is experiencing a huge renaissance in both economic growth and in-migration as coastal markets continue to expand the gap in affordability, with a whopping 50.7 percent increase in combined single-family and multifamily starts over the previous month. This compares to starts that were 10.3 percent lower in the Northeast, 15.7 percent higher in the South, and 7.9 percent lower in the West.
So there are now 683,000 single-family homes under construction; this is 6.1 percent lower than a year ago. Meanwhile, there are currently 983,000 apartment units under construction, and this is up 2.5 percent compared to a year ago at 959,000. Total housing units now under construction, single-family and multifamily combined, are 1.2 percent lower than a year ago.
Overall permits increased 1.9 percent to a 1.52-million-unit annualized rate in February and are up 2.4 percent compared to February 2023. Single-family permits increased 1.0 percent to a 1.03-million-unit rate and are up a stunning 29.5 percent compared to the previous year. Multifamily permits increased 4.1 percent to an annualized 487,000 pace but multifamily permits are down 29.0 percent compared to February 2023, which is a sign of future apartment construction slowing.
This activity is spilling over into builder sentiment, which has reached the highest level since July 2023. According to the NAHB/Wells Fargo Housing Market Index, March’s builder sentiment surpassed the breakeven point of 50 for the first time since last summer. Builder confidence in the market for newly built single-family homes climbed three points to 51, marking the fourth consecutive monthly gain for the index. It is also the first time that the sentiment level has surpassed the breakeven point of 50 since July.
I have said over and over again that when the Fed finally starts reducing rates, even at a quarter-point per meeting, watch home buyers come flying off the benches as pent-up demand drives a strong housing market for the rest of 2024.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.