Discrepancy Between Construction Figures and Rising Builder Confidence

Despite the National Association of Home Builders (NAHB) registering the third consecutive uptick in its gauge of home builder confidence, tangible residential construction endeavors witnessed a decline. According to the residential construction report for January, both the pace of permitting and housing starts experienced a downturn compared to the previous month, marking the second consecutive decrease for starts.

This discrepancy highlights a noteworthy disparity between the optimism expressed by builders and the actual construction activity on the ground. While builder sentiment remains buoyant, reflecting positive market expectations, the recent downturn in construction activities underscores ongoing challenges and obstacles within the housing sector that may be hindering the translation of optimism into concrete development endeavors.

Despite the National Association of Home Builders (NAHB) reporting the third consecutive increase in its measure of builder confidence, recent data from the U.S. Census Bureau and the Department of Housing and Urban Development reveals a divergence in actual residential construction activity.

The report indicates that construction began on residential properties at a seasonally adjusted annual rate of 1.331 million units in January, representing a notable decline of 14.8 percent from the December rate of 1.562 million.

While the December rate was significantly higher than initially reported at 1.460 million units, January’s figures show a more modest trend. On a year-over-year basis, housing starts remained nearly flat, experiencing a marginal decline of 0.7 percent.

The downturn in residential construction was particularly evident in the single-family segment, where starts fell by 4.7 percent to an annual rate of 1.004 million units. However, this still marked a substantial improvement of 22.0 percent compared to the previous January. In contrast, multifamily starts plummeted by 35.8 percent from December to 314,000 units, representing a year-over-year decline of 37.9 percent.

In terms of permitting, the setback was less pronounced, with total authorizations dropping by 1.5 percent from December to an annual rate of 1.470 million units. However, on a year-over-year basis, permits increased by 8.6 percent, indicating ongoing demand for new construction projects. Single-family housing permits saw a modest uptick of 1.6 percent for the month and a significant surge of 35.7 percent compared to the previous year. Conversely, multifamily permitting declined by 9.0 percent from the previous month and 26.6 percent from the previous year.

While analysts had anticipated higher figures for both starts and permits, the actual data fell short of expectations. Despite the decline in construction activity, builder sentiment remains relatively optimistic, with the NAHB Housing Market Index (HMI) rising by 4 points in February to reach 48.

This upward trend reflects positive expectations driven by factors such as anticipated moderation in mortgage rates and the potential for future rate cuts by the Federal Reserve. Moreover, improved buyer traffic at the beginning of 2024 suggests growing interest among prospective homebuyers, further fueling optimism within the industry.

Despite the positive sentiment reflected in builder surveys, regional housing starts experienced widespread declines. Across all regions, housing starts tumbled compared to December figures, with notable declines in the Northeast, Midwest, South, and West. However, permitting figures painted a more mixed picture, with some regions experiencing increases despite the overall downward trend in construction activity.

Looking ahead, the residential construction report indicates that completions are also on the decline, further highlighting the challenges facing the housing market. With a backlog of permits and ongoing uncertainties in the economic landscape, the road to recovery for the residential construction sector may prove to be more gradual than initially anticipated.