The latest economic developments in the United States paint a complex picture of the housing market as of November 2023. Following a period of disruption caused by hurricanes, construction activity for single-family homes has begun to show signs of recovery. However, looming threats from import tariffs and large-scale deportations of undocumented immigrants cast a shadow over the industry's potential for growth in the coming year.
Recent data reveals a modest increase in permits for single-family home construction. This suggests that, despite slight improvements, residential investment may only contribute minimally to fourth-quarter economic growth. The Federal Reserve's ongoing interest rate cuts are aimed at spurring the economy, yet high mortgage rates continue to hinder the real estate market's recovery. Concerns about tariffs and immigrant deportations not only exacerbate existing issues but may also hinder future development.
Single-family home construction has traditionally dominated the residential building sector, comprising the majority of new housing units. In November, there was an impressive 6.4% increase, translating to an annualized rate of approximately 1.011 million units. Nevertheless, the residential construction landscape has faced significant challenges this year, primarily due to a severe shortage in the supply of existing homes. Although the Federal Reserve has cut rates several times since September, rising yields on 10-year U.S. Treasury bonds, driven by concerns over economic strength and potential inflation from new government policies, have kept 30-year fixed mortgage rates close to 7%.
Economists from JPMorgan, including Abiel Reinhart, have projected that the yield on 10-year bonds may only decrease by about 15 basis points by the end of next year, indicating limited room for mortgage rate reductions. The reduction in immigrant labor could further constrain homebuyer demand and limit the availability of workers in the construction sector.
The Federal Reserve's recent announcement marks its third consecutive interest rate cut, although predictions for the coming year have been adjusted to only two anticipated cuts, down from earlier forecasts of four. This change underscores the ongoing resilience exhibited by the economy. However, some economists express concerns that certain governmental policies could contribute to inflationary pressures. Bradley Saunders, a North American economist at Capital Economics, adopts a pessimistic outlook, emphasizing that trade and immigration policies might hinder homebuilders' capacities to deliver new homes.
The construction pace for single-family homes in October had significantly slowed due to the impacts of hurricanes Helen and Milton, but November brought a robust rebound of 18.3%. Conversely, single-family construction remains in decline in regions like the Northeast, Midwest, and West, with year-on-year statistics showing a 10.2% drop overall.
Meanwhile, the rate of multi-family housing construction has plummeted by 24.1% to an annualized rate of 264,000 units, which is the lowest level since March. Overall, residential construction permits decreased by 1.8%, settling at an annualized rate of 1.289 million units, down 14.6% year-over-year.
In November, single-family housing permits rose by a marginal 0.1% to reach an annualized rate of 972,000 units. The South saw a 1.8% increase in permits, but declines occurred in the Northeast and West, while the Midwest remained stable. Notably, permits for multi-family construction surged by 22.1%, achieving an annualized rate of 481,000 units. Cumulatively, the overall building permits increased by 6.1% to an annualized rate of 1.505 million units, reflecting a slight year-over-year decline of 0.2%.
Residential investments have posed challenges to GDP growth over the last two quarters. The Atlanta Fed projects a 3.2% annualized growth rate for GDP in the fourth quarter, up from 2.8% in the third quarter. The number of single-family homes under construction edged up by 0.7% to 144,000 units, and the overall completion rate increased by 3.3% to an annualized 1.038 million units. However, there has been a general decline in total residential completions by 1.9%, down to an annualized 1.601 million units. The inventory of homes under construction decreased by 1.8%, amounting to 1.434 million units, while the inventory for single-family homes declined by 0.8% to 637,000 units, marking the lowest level since March 2021.
A survey conducted by the National Association of Home Builders indicates a rise in builder confidence for December, reaching a seven-month high, primarily based on expectations for decreased government regulation. Nonetheless, economists warn that if the administration proceeds with its trade and immigration policies, lumber prices may surge further, intensifying the ongoing labor shortages within the construction sector.
The U.S. relies heavily on imported lumber from Canada, an essential material for residential construction. Earlier in the year, the administration hinted at imposing a 25% tariff on all goods imported from Canada and Mexico. The import duties on Canadian softwood products have already surged from 8.05% to 14.54%.
According to Nancy Vanden Houten, chief U.S. economist at Oxford Economics, a significant portion of the regulations governing residential construction originates from state and local governments. It's reported that non-citizen foreign workers make up approximately 18% of the labor force in the construction industry. The future trajectory of residential construction in the U.S. will heavily depend on how policy changes affect the delicate balance of supply and demand within the housing market.