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Flat Conditions for Custom Home Building

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NAHB’s analysis of Census Data from the Quarterly Starts and Completions by Purpose and Design survey indicates relatively flat conditions for custom home builders after a period slight softening of market share due to declining mortgage interest rates. However, post-election stock market gains should support custom building at the end of 2024 and going into 2025.

There were 48,000 total custom building starts during the third quarter of 2024. This marks a 4% decline compared to the third quarter of 2023. Over the last four quarters, custom housing starts totaled 178,000 homes, just below a 1% decline compared to the prior four quarter total (179,000).

After share declines due to a rise in spec building in the wake of the pandemic, the market share for custom homes increased until 2023 and then entered a period of retrenchment. As measured on a one-year moving average, the market share of custom home building, in terms of total single-family starts, has fallen back to 17%. This is down from a prior cycle peak of 31.5% set during the second quarter of 2009 and a 21% local peak rate at the beginning of 2023.

Note that this definition of custom home building does not include homes intended for sale, so the analysis in this post uses a narrow definition of the sector. It represents home construction undertaken on a contract basis for which the builder does not hold tax basis in the structure during construction.

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Growth for Single-Family Built-for-Rent Construction

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Single-family built-for-rent construction posted year-over-year gains for the third quarter of 2024, as builders sought to add additional rental housing in a market facing ongoing, elevated mortgage interest rates.

According to NAHB’s analysis of data from the Census Bureau’s Quarterly Starts and Completions by Purpose and Design, there were approximately 24,000 single-family built-for-rent (SFBFR) starts during the third quarter of 2024. This is 41% higher than the third quarter of 2023. Over the last four quarters, 92,000 such homes began construction, which is a more than 31% increase compared to the 70,000 estimated SFBFR starts in the four quarters prior to that period.

The SFBFR market is a source of inventory amid challenges over housing affordability and downpayment requirements in the for-sale market, particularly during a period when a growing number of people want more space and a single-family structure. Single-family built-for-rent construction differs in terms of structural characteristics compared to other newly-built single-family homes, particularly with respect to home size. However, investor demand for single-family homes, both existing and new, has cooled with higher interest rates. Nonetheless, builders continue to build projects of built-for-rent homes for their own operation.

Given the relatively small size of this market segment, the quarter-to-quarter movements typically are not statistically significant. The current four-quarter moving average of market share (9%) is nonetheless higher than the historical average of 2.7% (1992-2012).

Importantly, as measured for this analysis, the estimates noted above include only homes built and held by the builder for rental purposes. The estimates exclude homes that are sold to another party for rental purposes, which NAHB estimates may represent another three to five percent of single-family starts based on industry surveys. However, this investor market has cooled somewhat in recent quarters due to higher interest rates.

The Census data notes an elevated share of single-family homes built as condos (non-fee simple), with this share averaging more than 4% over recent quarters. Some, but certainly not all, of these homes will be used for rental purposes. Additionally, it is theoretically possible some single-family built-for-rent units are being counted in multifamily starts, as a form of “horizontal multifamily,” given these units are often built on a single plat of land. However, spot checks by NAHB with permitting offices indicate no evidence of this data issue occurring.

With the onset of the Great Recession and declines for the homeownership rate, the share of built-for-rent homes increased in the years after the recession. While the market share of SFBFR homes is small, it has clearly expanded. Given affordability challenges in the for-sale market, the SFBFR market will likely retain an elevated market share even as the rest of the building market expands in the coming quarters.

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Higher Mortgage Interest Rates Slow Housing Production in October

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Housing starts edged lower last month as average monthly mortgage rates increased a quarter-point from 6.18% to 6.43% between September and October, according to Freddie Mac.

Overall housing starts decreased 3.1% in October to a seasonally adjusted annual rate of 1.31 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

The October reading of 1.31 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts decreased 6.9% to a 970,000 seasonally adjusted annual rate. On a year-to-date basis, single-family construction is up 9.3%. The volatile multifamily sector, which includes apartment buildings and condos, increased 9.6% to an annualized 341,000 pace but are down 29.3% on a year-to-date basis.

Although housing starts declined in October, builder sentiment improved for a third straight month in November as builders anticipate an improved regulatory environment in 2025 that will allow the industry to increase housing supply. Further interest rate cuts from the Federal Reserve through 2025 should result in lower interest rates for construction and development loans, helping to lead to a stabilization for apartment construction and expansion for single-family home building.

While multifamily starts increased in October, the number of apartments under construction is down to 821,000, the lowest count since March 2022 and down 18.9% from a year ago. In October, there were 1.8 apartments that completed construction for every one apartment that started construction. The three-month moving average reached a ratio of 2 in October.

There were 644,000 single-family homes under construction in October, down 3.6% from a year ago and down 22% from the peak count in the Spring of 2022.

On a regional and year-to-date basis, combined single-family and multifamily starts are 10.4% higher in the Northeast, 1.7% lower in the Midwest, 5.0% lower in the South due to hurricane effects, and 4.4% lower in the West.

Overall permits decreased 0.6% to a 1.42 million unit annualized rate in October. Single-family permits increased 0.5% to a 968,000 unit rate and are up 9.4% on a year-to-date basis. Multifamily permits decreased 3.0% to an annualized 448,000 pace.

Looking at regional data on a year-to-date basis, permits are 0.9% higher in the Northeast, 3.9% higher in the Midwest, 2.4% lower in the South and 4.8% lower in the West.

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Single-Family Permits Higher in September 2024

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Over the first nine months of 2024, the total number of single-family permits issued year-to-date (YTD) nationwide reached 763,990. On a year-over-year (YoY) basis, this is an increase of 10.1% over the September 2023 level of 693,908.

Year-to-date ending in September, single-family permits were up in all four regions. The range of permit increases spanned 15.8% in the West to 7.8% in the South. The Midwest was up by 11.8% and the Northeast was up by 10.1% in single-family permits during this time. For multifamily permits, three out of the four regions posted declines. The Northeast, driven by New York, was the only region to post an increase and was up by 30.1%. Meanwhile, the West posted a decline of 31.7%, the South declined by 20.7%, and the Midwest declined by 8.4%.

Between September 2024 YTD and September 2023 YTD, 46 states and the District of Columbia posted an increase in single-family permits. The range of increases spanned 43.6% in New Mexico to 0.4% in Oregon. Maryland (-1.5%), New Hampshire (-1.6%), Alaska (-4.3%), and Hawaii (-7.7%) reported declines in single-family permits. The ten states issuing the highest number of single-family permits combined accounted for 63.1% of the total single-family permits issued. Texas, the state with the highest number of single-family permits, issued 122,976 permits over the first nine months of 2024, which is an increase of 10.5% compared to the same period last year. The succeeding highest state, Florida, was up by 1.7%, while the third highest, North Carolina, posted an increase of 8.5%.

Year-to-date ending in September, the total number of multifamily permits issued nationwide reached 362,543. This is 16.4% below the September 2023 level of 433,862.

Between September 2024 YTD and September 2023 YTD, 17 states recorded growth in multifamily permits, while 32 states and the District of Columbia recorded a decline. Georgia reported no change. Rhode Island (+134.6%) led the way with a sharp rise in multifamily permits from 309 to 725, while the District of Columbia had the biggest decline of 70.5% from 2,600 to 766. The ten states issuing the highest number of multifamily permits combined accounted for 63.2% of the multifamily permits issued. Over the first nine months of 2024, Texas, the state with the highest number of multifamily permits issued, experienced a decline of 27.5%. Following closely, the second-highest state in multifamily permits, Florida, saw a decline of 27.0%. California, the third largest multifamily issuing state, decreased by 33.4%.

At the local level, below are the top ten metro areas that issued the highest number of single-family permits.

For multifamily permits, below are the top ten local areas that issued the highest number of permits.

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Private Residential Construction Spending Rises in September

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Private residential construction spending inched up 0.2% in September, according to the Census Construction Spending data. The September report shows a 4.1% rise compared to a year ago.  

The monthly increase in total private construction spending for September was largely due to more spending on single-family construction. Spending on single-family construction rose by 0.4% in September. This broke a five-month streak of declines, aligning with the modest gains in single-family starts during September. Compared to a year ago, spending on single-family construction was 0.9% higher.  

In contrast, multifamily construction spending continued to decline, edging down 0.1% in September after a dip of 0.3% in August. Year-over-year, spending on multifamily construction was down 8.1%, as there is an elevated level of apartments under construction being completed. Meanwhile, private residential improvement spending stayed flat for the month and was 13.5% higher than a year ago.  

The NAHB construction spending index is shown in the graph below. The index illustrates how spending on single-family construction has slowed since early 2024 under the pressure of elevated interest rates. Multifamily construction spending growth has also slowed down after the peak in July 2023. Meanwhile, improvement spending has increased its pace since late 2023. 

Spending on private nonresidential construction was up 3.5% over a year ago. The annual private nonresidential spending increase was mainly due to higher spending for the class of manufacturing ($39.4 billion), followed by the power category ($6.9 billion). 

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Hurricanes and Strikes Hit Labor Market in October

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Job growth decelerated significantly in October, driven by the effects of strikes and hurricanes. As stated in this month’s job report, October data are “the first collected since Hurricanes Helene and Milton struck the United States”. Despite lower monthly job gains, the unemployment rate held steady at 4.1%, indicating the labor market remains solid.

In October, wage growth remained unchanged. Wages grew at a 4.0% year-over-year (YOY) growth rate, down 0.3 percentage points from a year ago. Wage growth is outpacing inflation, which typically occurs as productivity increases.

National Employment

According to the Employment Situation Summary reported by the Bureau of Labor Statistics (BLS), total nonfarm payroll employment rose by 12,000 in October, down sharply from a downwardly revised increase of 223,000 jobs in September, marking the smallest monthly job gain in years. The estimates for the previous two months were revised lower. The monthly change in total nonfarm payroll employment for August was revised down by 81,000, from +159,000 to +78,000, while the change for September was revised down by 31,000 from +254,000 to +223,000. Combined, the revisions were 112,000 lower than previously reported.

In the first ten months of 2024, 1,701,000 jobs were created. Additionally, monthly employment growth averaged 170,000 per month, compared to the 251,000 monthly average gain for 2023. The Fed’s easing cycle began on September 18, marking the end of a period of restrictive monetary policy. The U.S. economy has created about 8 million jobs since March 2022, when the Fed enacted the first interest rate hike of this cycle.

The unemployment rate was unchanged at 4.1% in October. While the number of employed persons decreased by 368,000, the number of unemployed persons rose by 150,000.

Meanwhile, the labor force participation rate—the proportion of the population either looking for a job or already holding a job—decreased by one percentage point to 62.6%. However, for people aged between 25 and 54, the participation rate declined for the third straight month to 83.5%. This rate still exceeds the pre-pandemic level of 83.1%. Meanwhile, the overall labor force participation rate remains below its pre-pandemic levels of 63.3% at the beginning of 2020.

In October, employment continued to trend up in health care (+52,000) and government (+40,000). Temporary help for business and professional services lost 49,000 jobs. Manufacturing employment fell by 46,000 in October. The BLS noted that a decline of 44,000 in transportation equipment manufacturing was “largely due to strike activity.”

Construction Employment

Employment in the overall construction sector increased by 8,000 in October, after 27,000 gains in September. While residential construction shed 5,300 jobs, non-residential construction employment added 13,500 jobs for the month.

Residential construction employment now stands at 3.4 million in October, broken down as 957,000 builders and 2.4 million residential specialty trade contractors. The 6-month moving average of job gains for residential construction was 3,000 a month. Over the last 12 months, home builders and remodelers added 44,500 jobs on a net basis. Since the low point following the Great Recession, residential construction has gained 1,388,200 positions.

In October, the unemployment rate for construction workers rose to 5.3% on a seasonally adjusted basis. The unemployment rate for construction workers has remained at a relatively lower level, after reaching 15.3% in April 2020 due to the housing demand impact of the COVID-19 pandemic.

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Single-Family Starts Trend Higher in September

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With the Federal Reserve beginning an easing of monetary policy and builder sentiment improving, single-family starts posted a modest gain in September while multifamily construction continued to weaken because of tight financing and an ongoing rise in completed apartments.

Overall housing starts decreased 0.5% in September to a seasonally adjusted annual rate of 1.35 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

The September reading of 1.35 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts increased 2.7% to a 1.03 million seasonally adjusted annual rate. On a year-to-date basis, single-family construction is up 10.1%. The September gain for single-family home building mirrored an increase for the NAHB/Wells Fargo HMI.

While single-family home building increased in September, higher mortgage interest rates in October are likely to place a damper on growth in next month’s data. Nonetheless, NAHB is forecasting a gradual, if uneven, decline for mortgage rates in the coming quarters, with corresponding increases for single-family construction.

The multifamily sector, which includes apartment buildings and condos, decreased 9.4% to an annualized 327,000 pace. This marks the weakest pace since May. Multifamily construction will remain weak as completions of apartments are elevated.

On a regional and year-to-date basis, combined single-family and multifamily starts are 9.0% higher in the Northeast, 2.0% lower in the Midwest, 4.6% lower in the South and 5.4% lower in the West.

Overall permits decreased 2.9% to a 1.43 million unit annualized rate in September. Single-family permits increased 0.3% to a 970,000 unit rate. Multifamily permits decreased 8.9% to an annualized 458,000 pace. This is the weakest reading since May.

Looking at regional data on a year-to-date basis, permits are 0.8% higher in the Northeast, 2.6% higher in the Midwest, 2.2% lower in the South and 5.1% lower in the West.

The number of single-family homes under active construction totaled 642,000 in September. After stabilizing recently, this is down just 4.5% from a year ago. The number of multifamily units under construction declined 3.4% in September to an 842,000 total. This is 16.5% lower than a year ago and is the smallest count since February 2022.

As a sign of the reversal for multifamily construction, the seasonally adjusted annual rate of multifamily construction was 680,000 in September. This was roughly twice the pace of multifamily starts, meaning for every two apartments finishing construction, only one new unit began construction. The pace of multifamily completions was up 41% compared to a year ago.

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Single-Family Permits Higher in August 2024

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Over the first eight months of 2024, the total number of single-family permits issued year-to-date (YTD) nationwide reached 685,923. On a year-over-year (YoY) basis, this is an increase of 11.5% over the August 2023 level of 615,453.

Year-to-date ending in August, single-family permits were up in all four regions. The range of permit increases spanned 16.2% in the West to 9.7% in the South. The Midwest was up by 12.3% and the Northeast was up by 10.3% in single-family permits during this time. For multifamily permits, three out of the four regions posted declines. The Northeast, driven by New York, was the only region to post an increase and was up by 28.9%. Meanwhile, the West posted a decline of 32.2%, the South declined by 21.8%, and the Midwest declined by 9.0%.

Between August 2024 YTD and August 2023 YTD, 47 states posted an increase in single-family permits. The range of increases spanned 44.5% in New Mexico to 1.5% in Maryland. New Hampshire (-1.2%), the District of Columbia (-3.2%), Hawaii (-7.9%), and Alaska (-21.4%) reported declines in single-family permits. The ten states issuing the highest number of single-family permits combined accounted for 63.5% of the total single-family permits issued. Texas, the state with the highest number of single-family permits, issued 110,907 permits over the first eight months of 2024, which is an increase of 12.4% compared to the same period last year. The succeeding highest state, Florida, was up by 5.0%, while the third highest, North Carolina, posted an increase of 10.6%.

Year-to-date ending in August, the total number of multifamily permits issued nationwide reached 326,080. This is 17.3% below the August 2023 level of 394,257.

Between August 2024 YTD and August 2023 YTD, 18 states recorded growth in multifamily permits, while 32 states and the District of Columbia recorded a decline. Wyoming (+104.8%) led the way with a sharp rise in multifamily permits from 125 to 256, while the District of Columbia had the biggest decline of 68.1% from 2,072 to 661. The ten states issuing the highest number of multifamily permits combined accounted for 64.1% of the multifamily permits issued. Over the first eight months of 2024, Texas, the state with the highest number of multifamily permits issued, experienced a decline of 27.8%. Following closely, the second-highest state in multifamily permits, Florida, saw a decline of 25.1%. California, the third largest multifamily issuing state, decreased by 31.5%.

At the local level, below are the top ten metro areas that issued the highest number of single-family permits.

For multifamily permits, below are the top ten local areas that issued the highest number of permits.

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Community Associations on the Rise in 2023

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In 2023, 64.8% of all new single-family homes started were built within a community or homeowner’s association. This share increased from the 62.6% recorded in 2022, according to data tabulated from the Census Bureau’s Survey of Construction (SOC). This marks the third highest share since the beginning of the series in 2009, after the high point of 67.1% in 2020 and 65.5% in 2021.  Prior to 2021, the share had been on a decade-long upward trend.  In absolute numbers, a total of 601,558 homes were started in community associations in 2023.

The Census Bureau defines community or homeowner’s associations as “formal legal entities created to maintain common areas of a development and to enforce private deed restrictions; these organizations are usually created when the development is built, and membership is mandatory.”

A recent NAHB study, What Home Buyers Really Want,  asked recent and prospective home buyers to rate the influence that 29 community features would have on their purchase decision.  For more than 65% of buyers, being near retail space and park areas, and having walking/jogging trails are the most influential community features. In contrast, only 39% feel the same way about a homeowner’s association.

When analyzed by the nine census divisions, the highest share of new homes started within a homeowner’s association was in the Mountain Division, where 81.9% of new homes were in such communities. In the Middle Atlantic Division, on the other hand, the share was only 28.6%. The share of new homes started within a community across U.S. divisions are shown in the map below.

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Patios Continue to Crowd Out Decks on New Homes

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While the share of new homes with patios continues to climb, the share with decks has hovered at a historic low of under 18%, according to NAHB tabulation of data from the HUD/Census Bureau Survey of Construction (SOC).

Every year from the re-design of the SOC in 2005 through 2018, over 22% of single-family homes started featured decks. After that, however, the share dropped significantly, reaching a low of 17.5% in 2021. Since then, the percentage has remained near that trough, at 17.7% in 2022 and 17.6% in 2023. Moreover, this has been occurring at the same time the share of new homes with patios was climbing to a record high 67.7%. In fact, the tendency of deck and patio percentages to move in opposite directions is evident throughout the 2005-2023 period. The correlation between the percentages over that span is -0.84, suggesting that patios on new homes have been functioning as a substitute for decks. When more new homes have patios, fewer have decks.

New homes with both a deck and patio do occur but are comparatively rare. Among single-family homes started in 2023, fewer than 6% featured both a deck and a patio.

Decks have been more common not only when but where patios are less common. For example, among single-family homes started in 2023, patios were least common (featured ion only 17% of the homes) in the New England Census Division, the same division where a high of 76% of the homes featured decks. At the other extreme, in the West South Central a divisional high 81% of new homes featured patios in 2023, and a divisional low of 3% featured decks. Across all nine divisions in 2023, the correlation between the percentages of new homes with decks and patios was -0.82.

Nevertheless, decks remain relatively popular on new homes in some parts of the country. Following the 76% in New England at a distance, 42% of new homes featured decks in 2023 in both the Middle Atlantic and West North Central divisions.

More detail on new home deck construction is available from the Annual Builder Practices Survey (BPS) conducted by Home Innovation Research Labs.

Nationally, the 2024 BPS report (based on homes built in 2023) shows that the average size of a deck on a new single-family home is 284 square feet. Across Census divisions, the average size ranges from a low of 230 square feet in New England to a high of 382 square feet in the adjacent Middle Atlantic.

On a square foot basis, the BPS shows an evolving geographic split in the material builders use most often in deck construction. In the West North Central, South Atlantic, East South Central and West South Central divisions, treated wood remains the top choice. In the New England, Middle Atlantic, East North Central and Mountain divisions, composite material has moved ahead of treated wood; while in the Pacific Division, concrete edged out composite for the top spot. The Pacific is also the only division where redwood (a species that can be used outdoors without special pressure treatment) is relatively common in new home deck construction.

A previous post covered the characteristics of patios on single-family homes built in 2023.

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