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New-Home Construction Improves as Builders Work Through Backlog of Permits—but Pressure From Inflation, Labor Shortages and Rising Rates Remain

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The numbers: U.S. home builders started construction on homes at a seasonally-adjusted annual rate of roughly 1.77 million in February, representing a 6.8% increase from the revised figures for the previous month, the U.S. Census Bureau reported Thursday. Compared with February 2021, housing starts were up 22%.

Meanwhile, permitting for new homes occurred at a seasonally-adjusted annual rate of roughly 1.86 million, down 1.9% from January. Nevertheless, permitting activity was up 7.7% from a year ago.

Economists polled by MarketWatch had expected housing starts to occur at a median pace of 1.7 million and building permits to come in at a median pace of 1.85 million.

What happened: A 5.7% increase in single-family starts drove the overall increase in new construction in February. Regionally, the Northeast saw the most notable improvement in housing starts with a nearly 29% increase on a monthly basis, while the West was the only part of the country to see decreased activity.

Permitting activity declined for both single-family and multifamily housing projects in February. However, there was significant regional variation. There were more building permits issued in the Northeast and West on a monthly basis, with 23% and 2% increases respectively, in February. But permitting activity declined in the Midwest and South.

The number of new housing units where construction was completed also increased in February, rising nearly 6% over the previous month, which was entirely driven by growth in the number of single-family homes where construction finished.

The big picture: The increase in housing starts in February was a welcome improvement, more than making up for the previous month’s decline. The falling number of COVID-19 cases and improved weather aided home builders in getting back to work.

If the drop in permits continues, it could signal a more conservative approach among builders. Sentiment in the construction industry has taken a hit as inflation cuts into profits and rising mortgage rates threaten demand. Builders already have a huge pool of permits to work from, so they have a long runway. But they may opt to hold off on seeking authorization proactively for homes if they begin to fear that housing demand will suffer as the cost to buy a home enters the stratosphere.

Looking ahead: “Pandemic-related worker absenteeism eased, enabling some progress in building activity,” Priscilla Thiagamoorthy, an economist with BMO Capital Markets, wrote in a research note.

“New residential construction is feeling the pressures of inflation, labor shortages and rising interest rates,” said George Ratiu, senior economist and manager of economic research at Realtor.com. “The trends are also reflected in stumbling homebuilder sentiment.”

“The overhang of building permits that has built up over the pandemic as a result of material and labor shortages is a positive signal for building ahead as supply bottlenecks ease, although home purchase intentions have started to drop off with higher mortgage rates,” said Katherine Judge, director and senior economist at CIBC Capital Markets, in a research note.

The post New-Home Construction Improves as Builders Work Through Backlog of Permits—but Pressure From Inflation, Labor Shortages and Rising Rates Remain appeared first on Real Estate News & Insights | realtor.com®.

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