Homebuyers have had it bad this year. Between mortgage rates that peaked at 8% in late October, high home prices, and extremely low levels of supply, it’s been exceedingly difficult and unaffordable for many people to break into the housing market. But there are small glimmers of hope going into 2024: For one, housing starts spiked in November to a six-month high.
New home starts jumped 14.8% last month from October’s revised estimate, and single-family housing starts increased 18% during the same period, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development said on Tuesday.
“The surprisingly strong November residential construction activity was driven by single-family building activity,” Lisa Sturtevant, chief economist with real estate listing service company Bright MLS, said in a statement. “The number of new single-family homes under construction was up more than 40% compared to a year ago.”
However, she continued, multifamily home starts fell 33.7% compared to a year ago.
Still, any new housing inventory is a welcome trend going into the new year for homebuyers, given existing-home sales plummeted a stunning 15% in September year-over-year, according to the National Association of Realtors (NAR)—the lowest figure in more than a decade. But it’s not enough to solve the nation’s housing crisis.
Not enough housing
“Despite the higher starts in November, we are still not building enough new housing to keep up with demand,” Sturtevant said, adding that the shortfall ranges from three to six million units. “A lack of sufficient new housing construction drives rents and home prices up, making it difficult for individuals and families to find housing they can afford.”
In some metropolitan areas, more home construction is already underway, Sturtevant said. And in areas where new apartment construction is booming, rents have either come down or rent increases have slowed. Also, the rise in apartment construction earlier this year has already begun to put “downward pressure on the shelter component of the inflation measure,” she added, referring to the consumer price index, in which housing costs are a major component.
Even with the unexpected surge in new construction, the country can use much more considering its exceedingly low inventory levels, National Association of Realtors’ chief economist Lawrence Yun said in a statement.
“Even more homebuilding will be needed with the housing shortage persisting in most markets,” he said. “Home price appreciation can only moderate from drastically improved supply. Another 30% rise in home construction can easily be absorbed in the marketplace,” especially in light of a plunge in mortgage rates during the past month from 7.34% to 6.64%, according to Mortgage News Daily.
In other words, the surge in new construction in November isn’t suddenly going to fix the housing crisis nationwide. The country remains “meaningfully underbuilt,” Odeta Kushi, deputy chief economist with financial services firm First American, said in a statement. Estimates show that the country is short 3.5 million to 5.5 million housing units, she said, echoing Sturtevant.
The “new supply of housing is more likely to ease rather than erase the national housing shortage, although this will of course vary by location,” Kushi said.
Nevertheless, it’s clear that the new home market has consistently outperformed the existing home market, as current homeowners hold onto their homes for fear of losing their below market mortgage rates—a phenomenon referred to as the lock-in effect. However, that’s not the only thing that’s keeping the new home market strong. Homebuilders are more often than not offering incentives or discounts, including mortgage rate buydowns, which can either reduce a buyer’s mortgage rate temporarily or for the entirety of the loan. Some builders are also covering up to tens of thousands of dollars in closing costs.
“The new home market is in many cases the only reliable supplier of for-sale inventory,” Kelly Mangold, principal of Bethesda, Md.-based real estate advisory RCLCO Real Estate Consulting, said in a statement. “Lower rates increase the affordability of new homes, and builders are continuing to ensure they have enough supply ready to meet the pent up demand from the past few years.”
In addition to the surge in new home construction, home prices, while increasing, have slowed for the third straight month in November, according to Redfin. Home prices rose 0.6% from a month earlier, the smallest increase since June, Redfin said, as measured by its home price index. The median sale price for houses sold in the U.S. is $431,000, as of the third quarter of this year, a nearly 28% increase from the same period in 2020, when the median price was $337,500.