Homebuilders are stepping up construction of single-family homes following a steady decline in mortgage rates and broad expectations among economists that home loan borrowing costs will ease further next year.
Builders broke ground on single-family homes in November at a seasonally adjusted annual rate of about 1.14 million units, the Commerce Department reported this week. That’s an 18% jump from October and a 42.2% increase from November last year. It also marks the fastest pace for single-family housing starts since April 2022.
Single-family housing starts have now risen three months in a row and are outpacing home completions for the first time since the spring of last year.
Even with November’s ramp-up, construction of single-family homes remains on pace for its second straight annual decline, with starts down 7.2% through the first 11 months of this year versus the same period in 2022.
Still, if mortgage rates continue to fall, that should spur more homebuyers to come off the sidelines and give builders more reason to accelerate construction next year.
Another incentive: The inventory of previously occupied homes for sale is likely to remain constrained because many homeowners have locked in a mortgage rate well below where rates are today.
Consider, some 67% of U.S. homeowners with a a mortgage have a 30-year fixed-rate home loan at 5% or less. Even with its recent decline, the average rate on a 30-year mortgage remains just under 7%, according to mortgage buyer Freddie Mac.
Several housing economists are projecting that mortgage rates will ease only moderately next year, with forecasts calling for the average rate on a 30-year home loan to remain above 6%. That means many homeowners are likely to remain discouraged from selling next year —- another incentive for builders to expand construction in 2024 off this year’s low level.
“New supply of housing is needed to meet demand, especially in an environment where most existing homeowners are rate-locked in and unwilling to part with their low mortgage rate,” said Odeta Kushi, deputy chief economist at First American. “Builders are benefitting from a lack of resale inventory. The recent decline in mortgage rates should contribute to the single-family momentum.”
The National Association of Home Builders is projecting a roughly 4% increase in single-family starts next year as “mortgage rates settle lower, economic growth slows and inflation moves lower,” according to Robert Dietz, the NAHB’s chief economist.
Realtor.com, meanwhile, projects a more modest 0.4% increase.
Lawrence Yun, chief economist for the National Association of Realtors, forecasts that builders will break ground on 1.04 million single-family homes next year. That would be amount to a 13% increase from a projected 920,000 starts this year.