Immediately after the Federal Reserve began increasing interest rates in March 2022, construction activity in the single-family housing market began to slow. Homebuilders had been facing higher costs and construction delays due to supply chain disruptions. In many cases prospective buyers of these new homes had agreed to purchase in the preceding months; but as mortgage rates rose, the effective cost of purchasing these homes rose, too, lowering their demand. Faced with weaker demand and a backlog of projects to complete, single-family homebuilders started fewer new homes and focused on completing existing projects.
Single-family housing starts dropped 32% between March and December of 2022, eventually leading to a decline in overall homes under construction. The FRED graph above shows the monthly data for single-family units under construction in red. You can see that, by mid-spring 2022, the number of single-family houses under construction had begun its fastest downward trend since the 2006-2009 period, falling at an average rate of roughly 9,800 units per month between May 2022 and September 2023. It’s worth noting that the single-family housing market hasn’t reacted so strongly to previous federal funds rate increases. Between November 2015 and January 2019, single-family units under construction continued to increase in the face of rate hikes, as it did between June 2004 and February 2006.
The story is different when we look at multi-family housing, shown in blue in the same FRED graph. The number of multi-family projects has mostly continued to climb over the past 16 months. Longer permitting and construction timelines in the multi-family space have kept the number of projects growing despite higher interest rates and costs. In fact, the number of multi-family projects under construction reached an all-time high in July 2023. The multi-family buildup has generally kept the total combined number of single- and multi-family units under construction stable around its own record-setting high of 1.7 million per month, as shown in the FRED graph below. It’s also worth noting that the single- and multi-family markets have not been so divergent in the past but were not always perfectly synchronized. When single-family units under construction embarked on its nearly 6-year slowdown in February 2006, multi-family units remained largely flat until July 2008 and began to bounce back almost a year before single-family units.
Trends have shown some change, though, for both multi-family and single-family construction. While the number of multi-family projects under construction in September 2023 remains about 10% higher than in September 2022, new multi-family projects started is more than 30% lower compared with the same time last year. This signals a slowdown in the number of multi-family projects under construction extending into 2024. But green shoots are beginning to sprout again in the single-family market, with housing starts picking up in recent months. (Starts are about 9% higher this September relative to one year ago.) This is welcome news for construction employment, which has so far proven resilient throughout the single-family slowdown, attributable to construction projects remaining historically elevated and evidence of a shortage of construction workers.
How this graph was created: Top graph: In FRED, search for and select “New Privately-Owned Housing Units Under Construction: Units in Buildings with 5 Units or More.” From the “Edit Graph” panel, use the “Add Line” tab to search and select “New Privately-Owned Housing Units Under Construction: Single-Family Units.” Bottom graph: In FRED, search for and select “New Privately-Owned Housing Units Under Construction: Total Units.”
Suggested by Charles Gascon and Joseph Martorana.
