Housing starts fell last year for the first time since 2009

REAL ECONOMY BLOG | January 19, 2023

Authored by RSM US LLP

The housing market continued to show little sign of reaching a bottom in December as housing starts and permits fell again to cap off the first year of decline since 2009.

Housing starts dropped by 1.4% on an annualized month-ago basis, while building permits fell by 1.6%. For all of last year, housing starts fell by 3%. The number for building permits dropped by 5%.

It was no surprise that the correction in the housing market was driven by the spike in mortgage rates, which reached 7% last fall before easing.

We expect the market to remain frosty for most of this year as the Federal Reserve most likely continues to lift interest rates and keep them elevated in its effort to tame inflation.

That means while mortgage rates might have peaked, they will stay elevated for a lot longer, limiting housing demand.

Without any near-term positive outlook on demand, builders continued to shift toward completing existing projects. Annual completions rose by 16% last year and surpassed 1.5 million units for the first time since 2006.

But long-term demand will remain unmet for a while. Both completions and starts failed to reach our estimate of an annual 1.7 million units needed to balance long-term demand. There is room for the market to bounce back once the correction ends, which won’t likely take place until next year.

The decline in December’s housing starts was driven by a drop in multi-unit starts. Single-family homes rose by 11.3%, the first increase in four months. Permits fell in all categories except for multi-family projects with five or more units, which increased by 7.1% on the month.