U.S. housing construction is declining, the construction backlog is rising as the shortage worsens

Construction of single-family homes for the residence of KB Home is shown under construction in the Valley Center community, California, USA June 3, 2021. REUTERS / Mike Blake

  • Commencement of housing falls 0.7% in October
  • Family starts fall by 3.9%; multifamily rose 6.8%
  • Building permits increase 4.0%; single-family increase 2.7%

WASHINGTON, Nov. 17 (Reuters) – U.S. single-family home construction fell in October, while the number of homes approved for construction but not yet started rose to its highest level in 15 years, underscoring the housing market disruption from a persistent shortage on materials and labor.

Although the report from the Ministry of Commerce on Wednesday showed an increase in permits for future housing construction, the increase was concentrated in the unstable multi-family housing segment. It will not do much to remedy an acute shortage of housing on the market, which has led to record-high annual increases in house prices.

“Housing activity continues to thunder,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “There are zoning problems, higher land costs, labor shortages, and inflation has inflated the price of raw materials.”

Initiation of single-family homes, which account for the largest share of the housing market, fell 3.9% to a seasonally adjusted annual rate of 1.039 million units last month. The fourth monthly decline in a row pushed the start to the lowest level since August 2020. Housing construction fell in all four regions with large declines in the Northeast, Midwest and West.

The densely populated south, where the bulk of housing construction takes place, reported a 1.8% drop in single-family starts.

Initiation of housing and building permits

Housing construction has essentially trampled water this year as builders struggle with shortages and higher commodity prices. A study by the National Association of Home Builders on Tuesday showed that confidence among single-family home builders rose for the third month in a row in November, but noted that “supply-side challenges, including bottlenecks in building materials and lack of land and labor, remain stubbornly persistent.”

Timber used for framing remains expensive, and prices for copper, another essential material in residential construction, are high. In addition, there were about 333,000 job openings in the construction industry at the end of September. Some household appliances are in short supply.

Reuters graphics

Construction costs rose by a record 12.3% year-on-year in October, according to producer price data released last week.

Material pressure can ease in the winter, a typically slow season for housing construction in the Northeast and Midwest. A slowdown in the demand for houses due to reduced affordability can also help to reduce the pressure on supply.

Housing investment fell for the second consecutive quarter in the third quarter. It is likely to remain subdued for the last three months of the year.

“Supply chain bottlenecks are likely to limit construction activity in the short term, but the supply picture should look better in 2022,” said Abbey Omodunbi, senior economist at PNC Financial in Pittsburgh, Pennsylvania. “Declining affordability and rising mortgage rates will soften demand next year.”

Shares on Wall Street traded lower. The dollar dived against a basket of currencies. U.S. government bond prices were higher.

BUILDING PERMITS INCREASE

Starting for buildings with five units or more, it rose 6.8% at a rate of 470,000 units last month. Workers returning to offices and schools reopening for personal learning, thanks to COVID-19 vaccinations, are increasing the demand for rental apartments.

With a decline in the construction of single-family homes, the total number of housing starts fell by 0.7% to a rate of 1.520 million units in October.

Economists polled by Reuters had predicted that the beginnings would return to a rate of 1.576 million units.

The starts have fallen from 1.725 million unit pace scaled in March, which was a more than 14-1 / 2-year high.

Nevertheless, housing construction continues to be supported by a severe shortage of previously owned homes on the market, which has resulted in double-digit house price growth.

The backlog of single-family homes approved for construction but not yet started increased by 4.8% at a rate of 152,000 last month, the highest since August 2006. Permits for future housing construction rose 4.0% at a rate of 1.650 million units in October. Single-family permits rose 2.7% at a rate of 1.069 million units, leaving them just over the start.

Reuters graphics

Permits for buildings with five units or more increased by 6.5% at a rate of 528,000 units. Completion of housing was unchanged at a rate of 1.242 million units. Completion of single-family homes fell 1.7% to 929,000 units.

The stock of single-family houses under construction rose 1.4% to a rate of 726,000 units last month, the highest since May 2007. Multi-family houses under construction rose to the highest level in more than 47 years.

Over time, the housing backlog and more furniture could help bring more homes to market and cool house price inflation, which has put some first-time buyers on the sidelines. However, much will depend on the supply of building materials and other inputs as well as labor.

“The recent slowdown in project completion has limited home sales in new communities,” said Mark Vitner, senior economist at Wells Fargo in Charlotte, North Carolina. “That said, the growing backlog of projects should keep builders busy for the next few years.”

Reporting by Lucia Mutikani; Edited by Chizu Nomiyama and Andrea Ricci

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