Construction Slows Following Falling Home Sales

U.S. housing construction continued to slow in July as the interest rate-sensitive housing market bore the brunt Federal Reserve’s campaign against high inflation. Rising interest rates and high prices dropped the total number of units starting construction by 9.6% between June and July.

The Connection Between Mortgage Rates and Construction

Since peaking in April 2022, the number of total housing starts has fallen by 20%, demonstrating the tight connection between mortgage rates and construction. The 30-Year Fixed Rate Mortgage average has increased from a low of 2.65% in early January 2022 to 5.81% in late June. As of mid-August, the rate has settled lower at around 5.10%. Although mortgage rates today are not especially high in a historical context, the rate at which they have increased is unprecedented.

Based on a CONTI Capital analysis of data from CoStar, the U.S. can expect to see an estimated 437,000 multifamily units delivered nationwide by the end of 2Q 2023. By comparison, the average pace of new apartment construction over the past 10 years was an estimated 341,000 units per year.

Apartments Are in Demand

July’s permitting data, which is a more forward-looking measure of housing supply over the next couple of years, confirms the increasing pace of new apartment construction. While single-family permitting fell by 4.3% in July, multifamily permitting increased by 2.5%. The lack of single-family housing in the U.S. is contributing to the unprecedented demand for apartments. The latest construction data suggests that this cycle of rising interest rates will likely continue for the foreseeable future.

The relative scarcity of single-family housing development is pushing down home sales and contributing to rising home prices. According to the latest Case-Shiller home price index report, annualized single-family price growth continues to increase at a rapid pace. However, the majority of markets are now seeing a marginal deceleration in home price growth as the overall housing market begins to cool. Despite this deceleration, all of the housing markets we track posted double-digit home price appreciation in May, led by the Sun Belt metros of Tampa, Miami, Dallas, and Phoenix.

Looking Forward

We do not foresee significant, protracted declines in home values as a result of rising mortgage rates. The slowing pace of new construction in the single-family market will only exacerbate the current low levels of single-family construction, keeping the overall market tight. Given this extreme imbalance between supply and demand, the multifamily segment of the housing market will continue to service those would-be homebuyers who are simply priced out of the housing market.