Higher interest rates bit, but builders adjusted to them.
By Wolf Richter for WOLF STREET.
Construction starts of single-family houses and units in multifamily buildings (condos and apartments), fell by 9% in 2023, to 1.41 million housing units, the second year in a row of declines, from the 15-year high in 2021 (1.6 million housing units), according to Census data today. Compared to the 15-year high in 2021, construction starts fell by 11.7%.
But construction starts in 2023 were still the third-highest since 2006, after the recent records in 2021 and 2022, and were up by 10% to 50% from the range between 2013 and 2019.
As we’ll see in a moment, the blistering boom-and-bust cycles of overall residential construction are composed of epic multifamily and single-family booms-and-busts that occurred at different times.
Construction starts of single-family houses fell by 6.0% in 2023 from 2022, and by 16.2% from the 15-year high in 2021, to 944,500 starts, after a decade of increases that followed the Housing Bust which nearly destroyed the homebuilder industry.
Mortgage rates started rising in late 2021 and surged in 2022 and 2023, and the entire math changed. Homebuilders responded by building smaller homes at lower price points, buying down mortgage rates, and throwing other incentives at potential buyers, and this has kept their volume at still fairly high levels:
Construction starts of units in multifamily projects, such as condo and apartment buildings, fell by 14.4% in 2023 to 468,600 units. But 2022 had been the biggest year since 1986.
Still, multifamily construction starts were up by 17% from the range between 2015 and 2020, and up by 74% from the range in the decade before the Financial Crisis. They were the third highest since 1986, behind 2022 and 2021. But they were way below the crazy boom of the early 1970s that turned into an epic bust.
Multifamily projects tend to be big and have long lead times. Projects where construction started in the recent peak year 2022 were in the planning stages years earlier. It took till 2023 for the decline in multifamily starts to show, a year after single-family starts began to decline. Still, both were higher in 2023 than in the years before the pandemic.
In many densely populated cities and urban cores, such as in Manhattan, San Francisco, Boston, and other cities, multifamily is just about the only type of housing that is getting built. Most of the condos and apartments getting built are higher end. With these higher-end apartments, builders are targeting “renters of choice,” as the industry calls them, because that’s where the money is in expensive cities, which is part of the housing problem.
Single-family construction takes place further away from urban cores. This includes the hottest trend in housing construction: “build to rent” developments designed specifically as rentals mostly for “renters of choice,” and built either by large landlords or by builders that then fill the developments with tenants and sell the income-producing project to large landlords, pension funds, and other funds.
Starts of 2-4-unit multifamily projects are included in the overall multifamily starts. The numbers account for only 2.8% of multifamily starts. But they’re interesting because they testify to a shift in multifamily construction toward bigger projects. They used to be a much bigger deal but have fallen out of favor in the 1990s, and then brutally after the Housing Bust, collapsing by 80% to 90% from the peaks in the early 1970s through the early 1980s.
In 2023, starts dropped by 20% from 2022, to 13,100 units, down by 90% from the spike in 1972. But starts in 2022 of 16,400 had been a 15-year record amid speculation that this category would take off again.
Single-family construction dominates. Despite two years of declines in a row, single-family starts accounted for 67% of total residential construction starts in 2023. Multifamily accounted for 33%.
The chart shows the booms and busts in each segment, single-family in red and multifamily in blue.
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