New home construction slowed at the end of 2023

By Anna Bahney, CNN

Washington, DC (CNN) — The annual pace of new home construction pulled back last month after soaring in November, despite a historic shortage of housing inventory and falling mortgage rates.

Housing starts came down by 4.3% in December compared to the previous month, according to data released Thursday by the Census Bureau.

Starts fell to a seasonally adjusted annual rate of 1.46 million units last month, dropping from November’s pace of 1.56 million.

Still, homebuilding has improved from a year ago, with housing starts up 7.6% from the rate of 1.357 million units in December 2022.

In other good news for expanding the inventory of homes, building permits ticked up in December, climbing 1.9% from November’s revised number to a seasonally adjusted annual rate of 1.467 million.

Permits were 6.1% higher than a year ago.

Even though construction starts slowed to end 2023, there are tailwinds with mortgage rates trending lower that will help construction this year, said Kelly Mangold of RCLCO Real Estate Consulting, in a statement.

While average mortgage rates have ticked higher the past few weeks, they have settled at around 6.6%, one full percentage point lower than last year’s peak of 7.79%, according to Freddie Mac. And they are expected to continue to fall slowly in 2024.

Homebuilder sentiment in January is strong, according to a separate survey released on Wednesday, which showed optimism about the new construction market is the highest it has been since September.

New construction has benefited from the low inventory of homes on the resale market, where homeowners are reluctant to sell and give up their ultra-low mortgage rate for much higher prevailing rates. As mortgage rates come down, Mangold said, the resale market may become more active.

“The resale market, which has been relatively silent in 2023, may provide increased competition to the new home market if rates decline to a point that potential sellers feel less locked in to their mortgage than they did in 2023,” she said.

Expectations of lower mortgage rates in 2024 are a boon to homebuyers who may have more home options to chose from in the coming year.

New construction home completions were at a seasonally adjusted annualized rate of 1.574 million, which is 8.7% above November and 13.2% above the completions a year ago.

“Looking ahead, buyers who have been sidelined in 2023 may enter the market in 2024 if conditions improve, and lower rates will bring increased affordability to buyers,” Mangold added.

Applications for mortgages to buy a newly built home were up 22% from a year ago, although they were down 4% in December from the month before, according to a separate survey released Thursday by the Mortgage Bankers Association.

“The low level of existing homes for sale continues to divert prospective buyers to newly built homes,” said Joel Kan, MBA’s vice president and deputy chief economist, in the survey’s release.

The average loan size for new homes increased from $390,049 in November to $405,368 in December.

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