Single-family construction starts to dive as home builders drown in inventory. But multi-family construction at a 36-year high

The residential building is divided into two.

By Wolf Richter for WOLF STREET.

Start of construction of single-family houses has been falling all year as homebuilders try to unload a huge pile of inventory while sales have plummeted and foot traffic to see new properties has collapsed. In October, construction starts fell further.

Start of construction of multi-family projects – condominiums and apartment complexes – continues at the highest level since the multifamily boom of the 1980s.

Together, construction begins of all types of privately owned homes fell 4.2% in October from September and by 8.8% year-over-year, to a seasonally adjusted annual rate (SAAR) of 1.42 million housing units, according to the Census Bureau today.

In the period from 2000 to 2020, the number of households increased by 1.17 million per year on average, peaking with a decrease in 2020 (purple line). It sheds some light on the so-called “housing shortage” and “substructure”. But this equation doesn’t account for homes that are being used for non-residential purposes, such as vacant properties that are kept off the market by their owners to drive up price appreciation all the way; and such as homes used as short-term vacation rentals.

The jump in single-family construction:

Single-family home construction starts fell 6.1% in October from September and 21% from a year ago to a seasonally adjusted annual rate of 855,000 homes. Since the free money peak in December 2020, single-family home starts have fallen 35%.

But even the peak remains well below the Housing Bubble 1 peak of 2005, notorious for rampant overbuilding and the industry’s subsequent collapse.

Inventories of homes in various stages of construction have piled up by massive numbers, reaching 462,000 properties in September, the highest level since early 2008, according to separate Census Bureau data released last month. Mortgage rates have returned to normal pre-QE levels but house prices have not and it’s a toxic mix and it killed demand.

The boom in multi-family construction.

Construction starts on multifamily homes of five or more units, such as condominiums and apartment buildings, fell only slightly in October from September, but rose 17.3% from a year ago to a seasonally adjusted annual rate of 556,000 units.

In many densely populated cities and urban centers, multi-family housing is virtually the only housing type being built, such as in San Francisco, Boston, Manhattan, etc., while single-family construction occurs further away from the urban centers.

These preliminary estimates of multifamily construction starts are volatile from month to month. To show the long-term trends, I converted the monthly data into the three-month moving average (3MMA), which rose to its highest level since 1986.

The current rate of construction starts has increased by over 50% from the middle of the 2000-2008 interval; and it has increased about 40% from the middle of the range in 2015 to 2019:

Over a four-decade horizon, we can see booms and busts in the construction of single-family homes (red line in the chart below) and multi-family units (green line in the chart below). In the 1980s, overall, there was a huge boom in construction. Construction starts on multifamily units tripled during the period, leading to a long downturn afterward, while single-family construction continued to rise to finally blow the top off in 2005.

Turnaround times are much longer for multifamily projects and are measured in years for large towers. Once a project rolls, it will generally continue to roll. But home builders can cut their construction plans quite quickly. And it’s also visible in the chart: During housing bust 1, single-family construction began to decline in early 2006. But the multifamily didn’t fall until the Lehman bankruptcy blew a fuse in the financial system, putting financing for big projects in doubt, and everything came to a standstill:

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