Housing Starts Bounce Back in February

Single-Family and Multifamily Both Rebound from January's Decline

Economic Indicator

Economist(s)

Charlie Dougherty

Patrick Barley

Summary

Residential Construction Thaws Out

Housing starts jumped 10.7% during February, a gain which largely makes up for the sharp weather-induced drop registered in January. Both single-family and multifamily starts rebounded during the month. Permits took a similar trajectory and also experienced a broad-based upturn. February's rise in single-family permits is the latest evidence that home builders are planning to increase production in the months ahead alongside lower mortgage rates and improving economic growth prospects. Meanwhile, multifamily permits edged up in February, yet were still down considerably on a year-over-year basis. The downdraft suggests that tighter lending conditions, higher apartment vacancies and weaker rent growth continue to weigh multifamily development.

Single-Family Construction Continues to Trend Higher

Housing starts picked up 10.7% in February, fueled primarily by a jump in single-family starts which rose 11.6% over the month. The double-digit pick-up is partially owed to builders playing catch-up after inclement weather in January temporarily put construction on hold in wide swaths of the nation.
The weather-related improvement was most visible in the Midwest region, which saw single-family starts surge 40.2% over the month. The South and Northeast also registered a strong increase in single-family starts, while the West was the only region to experience a decline.
Single-family permits rose 1.0% over the month, the 13th consecutive monthly gain. The uptick in permits indicates further improvement in terms of starts over the next few months. The 1,031K-unit annual pace was the strongest pace since May 2022. Single-family permits are now up 35.2% year-over-year.
The improvement in the March NAHB Housing Market Index (HMI) is a sign that builders are becoming more enthusiastic about the increasing likelihood of a soft landing and lower interest rates. The HMI rose to 51 from 48 in March, marking the fourth consecutive monthly gain.
March was the first time since July 2023 that builder sentiment has surpassed the break-even point of 50. Builders are pulling back on price cuts as they become more confident that their homes will sell. Just 24% of builders reported cutting prices in March, the lowest share since July 2023.

Source: U.S. Department of Commerce and Wells Fargo Economics

Source: U.S. Department of Commerce, NAHB and Wells Fargo Economics

Multifamily Still Finding its Footing

Multifamily starts and permits rose 8.3% and 4.1% over the month, respectively. Monthly movements in multifamily activity are highly volatile, and on trend, multifamily construction still looks to be finding its footing. In February, multifamily starts and permits were down 34.8% and 29.0%, respectively, over the year. The downshift has occurred against a backdrop of tighter lending conditions, rising apartment vacancies and weak rent growth.
The slowdown in new starts looks to be allowing developers to focus their efforts on projects already underway. The count of multifamily units under construction fell to 983K units in February after reaching an all-time high in July 2023. Meanwhile, multifamily completions surged in February to a 657K-unit pace.
Although new development has shifted to a lower gear, some green shoots are evident in the multifamily market. Apartment demand has largely held steady amid a strong pace of economic growth and adverse affordability conditions in the single-family market. These factors should continue to be supportive of apartment demand in the near-term.
Last year, the NAHB introduced the Multifamily Production Index (MPI) which measures multifamily builder confidence and is published on a quarterly basis. In February, the MPI for Q4-2023 was released, revealing the measure of multifamily builder confidence improved to 41 from 38, but remained below the break-even point of 50.
The MPI has run below 50 for two consecutive quarters as tight lending standards and rising apartment vacancy rates have discouraged new development. The slump in builder confidence is in line with the downdraft in multifamily starts and permits over the course of 2023.

Source: U.S. Department of Commerce and Wells Fargo Economics

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Economics Group

Jay H. Bryson, Ph.D.	Chief Economist	704-410-3274	Jay.Bryson@wellsfargo.com
Sam Bullard	Senior Economist	704-410-3280	Sam.Bullard@wellsfargo.com
Nick Bennenbroek	International Economist	212-214-5636	Nicholas.Bennenbroek@wellsfargo.com
Tim Quinlan	Senior Economist	704-410-3283	Tim.Quinlan@wellsfargo.com
Sarah House	Senior Economist	704-410-3282	Sarah.House@wellsfargo.com
Azhar Iqbal	Econometrician	212-214-2029	Azhar.Iqbal@wellsfargo.com
Charlie Dougherty	Senior Economist	212-214-8984	Charles.Dougherty@wellsfargo.com
Michael Pugliese	Senior Economist	212-214-5058	Michael.D.Pugliese@wellsfargo.com
Brendan McKenna	International Economist	212-214-5637	Brendan.Mckenna@wellsfargo.com
Jackie Benson	Economist	704-410-4468	Jackie.Benson@wellsfargo.com
Shannon Grein	Economist	704-410-0369	Shannon.Grein@wellsfargo.com
Nicole Cervi	Economist	704-410-3059	Nicole.Cervi@wellsfargo.com
Patrick Barley	Economic Analyst	704-410-1232	Patrick.Barley@wellsfargo.com
Jeremiah Kohl	Economic Analyst	212-214-1164	Jeremiah.J.Kohl@wellsfargo.com
Aubrey George	Economic Analyst	704-410-2911	Aubrey.B.George@wellsfargo.com
Delaney Conner	Economic Analyst	704-374-2150	Delaney.Conner@wellsfargo.com
Anna Stein	Economic Analyst	212-214-1063	Anna.H.Stein@wellsfargo.com
Coren Burton	Administrative Assistant	704-410-6010	Coren.Burton@wellsfargo.com

All estimates/forecasts are as of 3/19/2024 unless otherwise stated. 3/19/2024 11:03:38 EDT. This report is available on Bloomberg WFRE

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