New-home construction

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New-Home Starts Rise, But Still Not Enough

June 17, 2021

Builders can’t build fast enough as home buyer demand continues to surge. But rising material costs are proving a challenge, making it more difficult to keep new homes within buyers’ and builders’ budgets.

Still, the construction of single-family homes rose 4.2% in May, despite the rising costs. But they are poised to slow again as single-family permits—a gauge to future construction—declined to the lowest pace since September 2020, the U.S. Department of Housing and Urban Development and the U.S. Census Bureau reported Wednesday.

Any type of slowdown in home building could prove problematic for the housing market: The National Association of REALTORS® estimates that the nation faces a housing shortage of about 5.5 to 6.8 million homes.

The country is on track for only 1.6 million and 1.7 million new housing units this year and next, respectively, according to NAR. Still, “that would represent the best two-year performance in 15 years, yet it would still be inadequate,” says Lawrence Yun, NAR’s chief economist. “Therefore, expect both rents and home prices to outpace overall consumer price inflation in the upcoming years.”

Overall, housing starts—which includes single-family and the multifamily sectors—rose 3.6% in May compared to April. Regionally, combined single-family and multifamily starts were 46.3% higher in the Northeast (January through May of 2021 compared to the same time frame a year ago), up 37.2% in the Midwest, 26.4% higher in the West, and 19% higher in the South. The gains, however, come off low activity levels compared to last spring, the onset of the pandemic.

“Single-family starts held firm in May as demand remains strong despite recent gains in new home costs,” says Chuck Fowke, chairman of the National Association of Home Builders. “However, single-family permits posted a decline as higher construction costs are deterring some residential construction activity. Policymakers need to help the industry’s supply-chains in order to protect housing affordability.”

Lumber prices and other material costs have surged over recent months. But there is hope for a turnaround on that front. Read more: Lumber Prices Are Dropping Fast.

As for now, single-family permits are falling as the home building market “cools somewhat to adjust to higher prices and longer delivery times of building materials,” says Robert Dietz, NAHB’s chief economist. “The count of single-family homes permitted but not started construction is up 53% over the last year due to both gains for home construction since the onset of the 2020 virus crisis and the delay of some building projects due to higher costs for materials and labor.”