January Shows Upswing in Construction; High Demand Offsets Higher Costs-For Now

February 22nd, 2021 by Editor

A report issued last week from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau Housing showed that production softened in January as rising lumber prices continue to affect the housing industry. Overall housing starts decreased 6.0 percent to a seasonally adjusted annual rate of 1.58 million units.

The January reading of 1.58 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts decreased 12.2 percent to a 1.16 million seasonally adjusted annual rate. The multifamily sector, which includes apartment buildings and condos, increased 17.1 percent to a 418,000 pace.

“Concerns over higher lumber prices produced softness for the housing market amid solid buyer traffic at the start of the year,” said Chuck Fowke, chairman of the National Association of Home Builders (NAHB) and a custom home builder from Tampa, Fla. “With the cost of building materials rising at a rapid pace, the challenge for builders is to keep home prices at an affordable level for buyers even as the regulatory policy environment may become more challenging.”

“The weakness in housing starts in January is consistent with our recent builder surveys,” said NAHB chief economist Robert Dietz. “Builders report concerns over increasing lumber and other construction costs and delays in obtaining building materials. Rising interest rates will also erode housing affordability in 2021, as existing home inventories remain low. It’s also worth noting that the number of single-family homes permitted, but not started construction jumped to 114,000 units in January. This is 9.6 percent higher than December and 28.1 percent higher than a year ago, as building material cost increases and delays slow some home building.”

On a regional basis compared to the previous month, combined single-family and multifamily starts are 2.3% higher in the Northeast, 12.3% lower in the Midwest, 2.5% lower in the South and 11.4% lower in the West.

Overall permits increased 10.4% to a 1.88 million unit annualized rate in January. Single-family permits increased 3.8% to a 1.27 million unit rate. Multifamily permits increased 27.2% to a 612,000 pace.

Regional permit data compared to the previous month shows permits are 39.3% higher in the Northeast, 0.8% lower in the Midwest, 8.3% higher in the South and 11.7% higher in the West.

The latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) shows that a strong buyer demand helped offset the surge in lumber prices and subsequent supply chain challenges, which has created a strain for homebuilders, as builder confidence in the market for newly built single-family homes inched up one point to 84 in February.

“Lumber prices have been steadily rising this year and hit a record high in mid-February, adding thousands of dollars to the cost of a new home and causing some builders to abruptly halt projects at a time when inventories are already at all-time lows,” said Fowke. “Builders remain very focused on regulatory and other policy issues that could price out households seeking new homes in a tight market this year.”

“Demand conditions remain solid due to demographics, low mortgage rates and the suburban shift to lower cost markets, but we expect to see some cooling in growth rates for residential construction in 2021 due to cost factors, supply chain issues and regulatory risks,” added Dietz. “Some builders are at capacity and may not be able to expand production due to these headwinds.”

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