Starts have dropped for the second consecutive month — by 10% overall and by 15% for multifamily units, reversing recent trends.
By Manuel Gutierrez, Consulting Economist to NKBA
New residential construction retrenched last month for the second consecutive month. The consequential 10.3% drop in total housing starts was a surprise, given the expectation that new housing starts would continue to rise. This was based on the assessment that the current housing shortage could at least be partially addressed through new construction.
February’s new housing construction of 1.42 million units was the lowest since August. However, as can be seen in Figure 1, starts are still higher than the total number started last year, which is illustrated by the horizontal dashed line. In fact, the monthly rate of new housing construction has exceeded last year’s total every month since July 2020.
February’s slower pace is generally attributed to a wave of extremely cold weather that hit numerous parts of the nation.
In fact, nationally, February’s temperatures tracked about 10% below the average for the month.
However, the drop in starts was not entirely due to the weather; Construction also fell in January despite above-average temperatures for that month.
Another contributing factor to the decline was a shortage of material availability, which has been plaguing the industry. Anecdotal evidence suggests there are major bottlenecks in business supply lines. Seaport terminals are facing increases in products shipped from abroad, mainly China, but are constrained by shortages of dock workers. Although this may not impact housing construction directly, it could have residual effects.
Construction of new single-family homes fell by 8.5% in February, down to an annual pace of 1.04 million units. Still, it was not as pronounced as the 14.1% shortfall in January. For February, the largest drop in starts was in the multifamily sector, where construction of housing units in small and large buildings was off significantly last month, with the combined total down to 381,000 units, or 15% lower than in January.
Figure 2 provides a long view of housing construction back to 2000. The shaded bars represent the three economic recessions over that 20-year period. The severity of the current one for housing can be easily appreciated by the sharp drop in starts, from an annual rate of roughly 1.5 million units just before the recession to only 1 million immediately after it began. In contrast, it took almost two full years during the 2007-2009 recession for housing to drop by a similar number of starts (500,000).
Housing starts in three of the four regions suffered setbacks. The only exception was the West, where housing starts bucked the trend.
The most important region, which alone accounts for more than half of new housing starts, is the South. Starts there fell by 10% in February to an annual rate of 725,000 units. This also follows a drop in the previous month, although by a smaller magnitude of 4.4%. The number of new housing permits issued also fell in February, by 10.8%, to a rate of 1.68 million units. The decline may suggest a further drop in starts this month.
Figure 4 displays starts and permits for the last two years. As expected, both follow similar patterns and are highly correlated.
