New housing starts expected to gain before slight drop

ORLANDO, Fla.—Following two years of double-digit increases, single-family housing starts are expected to increase by 1 percent to 1.29 million units in 2022 and then drop in 2023.

The housing market is caught in a number of crosswinds, according to a panel of economists who offered their outlooks for new construction on Feb. 8 at the International Builders' Show in Orlando.

A lot of homeowners stayed put during the pandemic, which created a lack of resale inventory that bodes well for builders, along with the number of millennials looking for their first house. However, those tail winds have been tempered by higher mortgage interest rates for buyers and supply-side constraints brought on by the COVID-19 pandemic.

The lack of building materials is the No. 1 challenge for the construction industry right now, said Robert Dietz, chief economist for the National Association of Home Builders, which puts on IBS.

"It's the most immediate short-run challenge and it's not just the cost, but availability and delivery," Dietz said. "Lumber has been the poster boy of the challenges, but broadly speaking it's everything including the kitchen sink."

Single-family housing starts had increased 13 percent in 2020 and 11 percent in 2021 to 1.1 million units as homeowners found themselves able to work and learn remotely away from crowded cities and suburbs.

However, manufacturers haven't been able to keep up with demand for building products and construction crews are shorthanded while federal officials look to monetary policies to head off record inflation.

Dietz expects a 1-percent drop in single-family housing starts in 2023 to 1.1 million units again.

"We're looking for roughly a slight gain for single-family starts—above 1.1 million for the year—and we think that will level off right there for 2023. We actually have a little bit of negative growth rate for 2023. That's the impact of those higher interest rates," Dietz said.

On the bright side, the 2022 forecast is better than three years ago, when U.S. homebuilders began construction on 889,000 houses, Dietz said.

"It's a flat forecast, but it's 26 percent higher in terms of the volume level we were building in 2019. So the entire market has shifted up as a result of COVID," he added.

NAHB expects multifamily housing starts to increase 6 percent to 496,000 units this year, fueled by low vacancies and rising rents. A 2 percent increase is projected for 2023 to 488,000 units.

For residential remodeling, NAHB forecasts a 6 percent increase this year and another 3 percent in 2023, which reflects homeowners continuing to use their homes for purposes such as fitness and entertainment.

Although 2022 is off to a weaker start, the soft patch should be temporary as concern about the COVID-19 variant omicron wanes and supply chains heal, according to David Berson, chief economist for Nationwide Mutual Insurance Co. in Columbus, Ohio.

"There was a breakdown of supply chains in an attempt to stop COVID from spreading. We took away supply and added to demand," Berson said.

Manufacturer attempts to build up inventory continues to be sucked up by demand, he added.

"Until you have enough supply, prices will up," Berson said.

Building material costs for residential construction are up 21 percent year over year, NAHB said.

With inflation running above the Federal Reserve's 2 percent target rate, tighter monetary policies are expected in March and that will add to pressure on mortgage rates. NAHB anticipates four 25-basis point rate increases in 2022 that will bring the average 30-year fixed rate mortgage over 4 percent by the end of 2022.

Noting that new homes are needed where the population growth is highest, Frank Nothaft, chief economist at CoreLogic, said the states that registered the highest net population growth between 2020 and 2021 were Texas, Florida, North Carolina, Arizona and Georgia. The states with the highest net growth rate on percentage basis were Idaho, Utah, Montana, Arizona and South Carolina, Nothaft added.

"Population growth in the South and Mountain West will drive new-home demand," he said. "Texas and Florida top the list and are the only two states to register a six-figure gain in population growth between 2020 and 2021, at 310,000 and 211,000, respectively."

During the same period, the top five metro markets in terms of new home sales were Dallas, Houston, Atlanta, Phoenix and Austin.

For the entry-level and first-time homebuyer market, Nothaft said that the states with the highest increase in 20- to 29-year-olds by 2030 will be Idaho, followed by Utah, Florida, Arizona and Texas.