Multifamily housing starts down 50%

Key Rate Indices

State of the Market

Recent economic releases and data highlights:

Atlanta Fed Reduces Q2 GDP Estimate: “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 is 3.0 percent on June 20, down from 3.1 percent on June 18.” [Atlanta Fed]

Building Permits Decrease: US building permits declined 3.8% to 1.386 million seasonally adjusted annual rate (SAAR) in May 2024, falling short of the expected 1.45 million and reaching the lowest level since June 2020.

National Association of Realtors (NAR): Existing-home sales decreased to 4.11 million seasonally adjusted annual rate (SAAR) in May; median house prices increased 5.8% Year-over-Year (YoY).

Jobless Claims Increased: Initial claims (through the week of June 8th) jumped to 242,000 (highest since August 2023), while continuing claims reached 1.820M (highest since November 2021), both surpassing expectations and previous reports.

Multifamily housing starts down 50% Year-over-Year

The latest housing report reveals a stark reality for the commercial multifamily real estate sector, with Census data confirming a trend far beyond a “reversion to the mean”.

Some takeaways from the Census Bureau’s May Housing Starts report:

  • Multifamily (5+ unit) starts plummeted 10.3% Month-over-Month (MoM) to 278,000 units in May
  • Year-over-Year (YoY), multifamily starts have dropped by more than 50% – the largest annual decline since the Great Financial Crisis
  • Total starts in recent months are below 300,000, resembling levels from 2012-2013 rather than the more robust 2015-2019 period

This dramatic slowdown in multifamily construction can be attributed to a few roadblocks:

  • High interest rates: Higher borrowing costs are making new projects less financially viable.
  • Recent surge in completions: The market is absorbing a wave of newly finished multifamily units, leading to increased competition and potential oversupply in some areas.
  • Cheaper to buy than build: Acquisition of existing multifamily assets has become more attractive than new construction, as purchase prices are often lower than current development costs.
  • Tightening lending standards: Banks and other financial institutions are becoming more cautious, making it harder for developers to secure financing for new projects.

Single-Family Housing Starts:

The single-family home sector is also struggling, with starts falling 5.2% to their lowest level since October 2023.

The severity of the decline is further emphasized by the fact that total housing starts in May fell to their lowest rate since July 2020. This downward trend is pushing multifamily construction activity towards levels not seen since the early 2010s, signaling a significant shift in the market.

Market sentiment reflects these challenges, with Fannie Mae’s May survey revealing record-high pessimism – an all time high 86% of respondents believe it’s a bad time to buy a home.

Inflation positively surprises – shows signs of easing

Inflation data came in lower than expectations:

The US annual Consumer Price Index (CPI) inflation rate unexpectedly slowed to 3.3% in May 2024. This figure was below both the April rate of 3.4% and economists’ projections of 3.4%. Month-over-Month (MoM) CPI remained unchanged.

Some takeaways from this report include

  • Core CPI, which excludes food and energy prices, decreased to 3.4% YoY from 3.6% in April. The MoM core CPI also declined to 0.2% from 0.3%.
  • Core CPI excluding shelter costs rose by 1.9% year-over-year in May, a significant drop from the 2.1% recorded in April, indicating that underlying inflationary pressures are easing.
  • Shelter costs, which have been a major driver of inflation, increased by 5.4% YoY.
  • Housing costs, measured by the Personal Consumption Expenditures (PCE) index, rose by 5.6% year-over-year in April, a minor decrease from the 5.8% recorded in March.The Shelter and Housing indexes, which are accounting for the majority of inflation at this point, continue to follow a gradual downward trend as they catch up to private data.

PPI (Producer Price Index) for May 2024:

Expected: +0.1%

Actual: -0.2%

This unexpected decline in the PPI is a positive sign for inflation control, as it indicates lower costs for producers. However, it’s important to view this in the context of recent trends:

  • May 2024: -0.2%
  • March 2024: -0.1%
  • December 2023: -0.1%
  • October 2023: -0.3%
  • May 2023: -0.2%

While the May 2024 figure represents a step in the right direction, similar fluctuations have been observed over the past year, and it doesn’t necessarily translate into a sustained reduction in inflationary pressure without a consistent downward trend.