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Economic Report: New home construction slows as builders grapple with supply-chain headaches

The numbers: New construction slips, but permitting rises again

New home construction ebbed in October, but permitting activity continued at a steady clip, pointing to the challenges builders are facing in starting and completing projects.

U.S. home builders started construction on homes at a seasonally-adjusted annual rate of 1.52 million in October, representing a 0.7% decrease from the previous month, the U.S. Census Bureau reported Wednesday. Compared with October 2020, housing starts were up 0.4%.

The pace of permitting for new housing units increased in October, however. Permitting for new homes occurred at a seasonally-adjusted annual rate of 1.65 million, up 4% from September and 3.4% from a year ago. Economists polled by MarketWatch had expected housing starts to occur at a median pace of 1.63 million and building permits to come in at a median pace of 1.58 million.

What happened

The overall pace of housing projects being completed remained unchanged between September and October, but the rate at which builders finished work on single-family homes declined roughly 1.7% over that time frame.

Every region nationally saw an increase in permitting activity, led by an 8.3% uptick in the Midwest. Permits rose for all building types as well. Single-family permits increased 2.7%, whereas permits for buildings with two to four units lifted 8.2% between September and October. Multifamily permits increased 6.5% on a monthly basis.

The drop in housing starts was caused by a 3.9% decline in new construction for single-family homes. Multifamily starts actually rose 6.8% between September and October. Regionally, every part of the country recorded a downturn in housing starts except for the Midwest.

The big picture

The mixed message from the Census Bureau’s new home construction report points to the supply chain-related challenges home builders are facing.

Building materials are still harder to come by than they were before the COVID-19 pandemic, and labor shortages continue to plague the construction sector. Both these factors have hampered home builders’ ability to scale up the pace of construction.

That said, the demand for new homes remains elevated. “September new home sales figures were strong which reflects market optimism, and indicates that once materials and labor become readily available we are likely to see a similar surge in starts,” said Kelly Mangold, a principal with RCLCO Real Estate Consulting.

What they’re saying

“In September, homes under construction hit a 47-year high. With builders’ resources so stretched, starting new constructions is being held back,” Benjamin Reitzes, macro strategist at BMO Capital Markets said in a note, citing research from his colleague, BMO senior economist Sal Guatieri.

“With demand still strong and inventories low, the backdrop for building activity should improve as supply constraints gradually ease,” Rubeela Farooqi, chief U.S. economist for High Frequency Economics, said in a research note.

“With one-in-four homeowners reporting that they aren’t selling this year because they can’t find a next home to buy in their price range, existing homeowners are facing a bit of a catch-22. For many markets, new construction is the solution,” said Danielle Hale, chief economist at Realtor.com.

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