US housing starts plunge to 3-year lows, but it’s not all bad news
America’s housing shortage is reaching epic proportions after residential construction plunged in August to Covid-era levels. Housing starts fell by 11.3% in August to a seasonally adjusted annual rate of 1.283 million units, according to the Commerce Department.
That's the lowest level since June 2020, when the nation was gripped in government-mandated lockdowns. Compared to August 2022, homebuilding was down 14.8%.
Single-family starts, which account for the bulk of residential construction, declined by 4.3% to a rate of 941,000 units.
The data paint a grim picture of the U.S. housing market, which faces its worst affordability challenge of a generation. Help appears to be on the way, but not anytime soon.
Building permits show promise
The one positive spin on the August data was the unexpectedly large jump in building permits, which are a proxy for future construction plans.
Permits for residential homes rose by 6.9% to a rate of 1.543 million units—the highest since October 2022. Permits to build one-family homes also rose to the highest level since May 2022.
According to realtors, the number of housing starts should be closer to the number of permits that were issued in August to help ease the supply shortage.
"The undersupply of single-family homes on the market could provide growth opportunities for home builders, especially the companies building entry-level homes for the large cohort of millennials looking to buy," Jeffrey Roach, chief economist at LPL Financial, told Reuters.
Homebuilders have known about these “growth opportunities” for years. The problem is they don’t have the resources to ramp up construction to meet demand.
As Freddie Mac explains, housing shortages are caused by a confluence of factors—not enough skilled labor, regulations over land use, and pushback from major suburbs and cities. An overlooked reason is the rising cost of construction materials such as lumber and steel.
Then there’s the simple fact that American cities are growing rapidly and outpacing what the industry can produce.
In fact, data from Moody’s Analytics and the Fed show that housing construction never really recovered from the 2008 financial crisis.
How big is the shortage, really?
The real housing shortage isn’t just a lack of homes for sale—it includes rental units, too.
Freddie Mac estimates that America is short by roughly 3.8 million homes, a figure that includes rental units and for-sale units. Real estate listing website Realtor.com says the gap is closer to 6.5 million when accounting for the pace of construction between 2012-2022.
Looking to the future, the National Multifamily Housing Council, a non-profit trade group based in Washington, D.C., forecasts that America will need an additional 4.3 million apartments by 2035 just to meet demand.
Different figures, but all tell the same story: the current pace of housing construction isn’t enough.
There’s reason to believe the problem will get worse unless the construction industry can somehow hire an additional 545,000 workers beyond its typical hiring pace. According to ABC, that’s how many workers are needed to build the homes Americans want and need.
It’s not just a numbers game, either; the supply shortage has a monumental impact on the lives of typical Americans who’ve been priced out of the market due to rising housing costs.
About 2.5 million households shopping for their first home will be fully shut out of the market this year, according to Nadia Evangelou, senior economist with the National Association of Realtors. That represents roughly 15% of all first-time buyers.
Now probably isn’t the best time to be house hunting, anyway, unless you can parlay the equity from your existing home into a new property. Mortgage rates are well north of 7% and could go even higher depending on the Fed’s next move.