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Solid Levels of Single-Family Built-for-Rent Construction

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Single-family built-for-rent construction posted year-over-year gains as of the second 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 23,000 single-family built-for-rent (SFBFR) starts during the second quarter of 2024. This is almost 10% higher than the second quarter of 2023. Over the last four quarters, 83,000 such homes began construction, which is a more than 20% increase compared to the 69,000 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 (8%) 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.

The Census data notes an elevated share of single-family homes built as condos (non-fee simple), with this share averaging more than 3% 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.

Nonetheless, demand by investors for single-family rental units, new and existing, has cooled in recent quarters as financial conditions remain tight. This will continue to cool some investor demand for SFBFR housing.

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 sector cools in the quarters ahead.

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Best Quarter for Custom Home Building in Almost Two Years

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NAHB’s analysis of Census Data from the Quarterly Starts and Completions by Purpose and Design survey indicates gains for custom home building after some recent slowing. Custom home building typically involves home buyers less sensitive to changes for interest rates.

There were 52,000 total custom building starts during the second quarter of 2024. This marks an almost 6% increase compared to the second quarter of 2023 and the best reading since the third quarter of 2022. Over the last four quarters, custom housing starts totaled 180,000 homes, a 5% decline compared to the prior four quarter total (189,000) due to weakness in prior quarters.

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 just under 18%. 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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Townhouse Construction Gains Continue

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Year-over-year gains for townhouse construction continued during the second quarter 2024 as demand for medium-density housing continues to be solid despite slowing for other sectors of the building industry.

According to NAHB analysis of the most recent Census data of Starts and Completions by Purpose and Design, during the second quarter of 2024, single-family attached starts totaled 42,000, which is 8% higher than the second quarter of 2023. Over the last four quarters, townhouse construction starts totaled a strong 174,000 homes, which is 23% higher than the prior four-quarter period (142,000). Townhouses made up almost 15% of single-family housing starts for the second quarter of the year.

Using a one-year moving average, the market share of newly-built townhouses stood at 17.2% of all single-family starts for the second quarter. With recent gains, the four-quarter moving average market share remain at the highest on record, for data going back to 1985.

Prior to the current cycle, the peak market share of the last two decades for townhouse construction was set during the first quarter of 2008, when the percentage reached 14.6%, on a one-year moving average basis. This high point was set after a fairly consistent increase in the share beginning in the early 1990s.

The long-run prospects for townhouse construction are positive given growing numbers of homebuyers looking for medium-density residential neighborhoods, such as urban villages that offer walkable environments and other amenities. Where it can be zoned, it can be built.

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Homes Built in Age-Restricted Communities

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Of the roughly 950,000 single-family and 470,000 multifamily homes that started construction in 2023, 49,000 (30,000 single-family and 19,000 multifamily) were built in age-restricted communities, according to NAHB tabulation of data from the Census’s Survey of Construction. A residential community can be legally age-restricted, provided it conforms to one of the set of rules specified in the Housing for Older Persons Act of 1995. 

NAHB was first successful in persuading HUD and the Census Bureau to collect and publish data on the age-restricted status of new homes in 2009, during the depths of the housing downturn. In 2009, builders started only 17,000 homes in age-restricted communities (9,000 single-family and 8,000 multifamily).  The numbers then increased steadily until reaching 60,000 age-restricted starts (roughly evenly split between single-family and multifamily) in 2018. These numbers fell during the pandemic but rebounded in 2021-2022, almost reaching the peak from 2018.  

In 2023, the total number of age-restricted home starts decreased by approximately 17% from 2022, down to 49,000. Overall, housing starts were lower than the previous year, with single-family and multifamily starts dropping by about 6% and 14%, respectively. However, age-restricted home starts showed a mixed trend: they increased for single-family homes but declined for multifamily homes. This shift was due to a higher percentage of single-family home starts being age-restricted compared to the previous year, while a lower percentage of multi-family home starts fell into this category. 

The SOC data allow for a comparison of the characteristics of new age-restricted single-family homes with other single-family homes started in 2023. The analysis reveals that age-restricted homes were more expensive, with a median price of $500,000, compared to $422,000 for non-age-restricted homes. This follows a similar tendency observed in 2022, when age-restricted homes had a median price of $547,000, compared to $461,000 for non-age-restricted homes.

However, in 2022, the median size was the same for both types of homes, making age-restricted homes more expensive per square foot. In 2023, on the other hand, the median size was 200 square feet larger for age-restricted homes, resulting in the same median price per square foot for both types of homes at $152.63. A difference was also apparent in lot value. Although the median lot size was the same for age-restricted and non-age-restricted lots (0.2 acres), the median value for age-restricted lots was $50,000 compared to $60,000 for non-age-restricted lots.

Additional data from the 2023 SOC reveal that age-restricted homes have distinct characteristics compared to non-age-restricted homes. A higher percentage of age-restricted homes are attached, single-story, and lack a basement. These homes are also more likely to come with patios and porches, but less likely to have decks.  Finally, age-restricted homes are less likely to require a loan and more likely to be purchased for cash, as home buyers who are older have had more of a chance to accumulate the savings and assets (often equity in a previous home) that can be converted to cash.

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Single-Family Permit Increase Moderates in June 2024

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Over the first half of 2024, the total number of single-family permits issued year-to-date (YTD) nationwide reached 514,728. On a year-over-year (YoY) basis, this is an increase of 14.6% over the June 2023 level of 449,226.

Year-to-date ending in June, single-family permits were up in all four regions. The range of permit increases spanned 19.9% in the West to 8.2% in the Northeast. The Midwest was up by 15.8% and the South was up by 13.2% in single-family permits during this time. For multifamily permits, three out of the four regions posted declines. The Northeast, the only region to post an increase, was up by 29.7%. Meanwhile the West posted a decline of 32.0%, the South declined by 24.4%, and the Midwest declined by 12.5%.

Between June 2024 YTD and June 2023 YTD, 47 states posted an increase in single-family permits. The range of increases spanned 44.3% in Arizona to 3.0% in Alaska. Rhode Island (-0.3%), New Hampshire (-1.3%), Hawaii (-6.8%), and the District of Columbia (-9.0%) reported declines in single-family permits.The ten states issuing the highest number of single-family permits combined accounted for 64.2% of the total single-family permits issued. Texas, the state with the highest number of single-family permits, issued 84,920 permits over the first half of 2024, which is an increase of 18.2% compared to the same period last year. The succeeding highest state, Florida, was up by 9.2%, while the third highest, North Carolina, posted an increase of 10.6%.

Year-to-date ending in June, the total number of multifamily permits issued nationwide reached 237,935. This is 18.9% below the June 2023 level of 293,301.

Between June 2024 YTD and June 2023 YTD, 19 states recorded growth in multifamily permits, while 31 states and the District of Columbia recorded a decline. New York (+109.8%) led the way with a sharp rise in multifamily permits from 8,943 to 18,761, while the District of Columbia had the biggest decline of 71.0% from 1,677 to 487. The ten states issuing the highest number of multifamily permits combined accounted for 64.3% of the multifamily permits issued. Over the first half of 2024, Texas, the state with the highest number of multifamily permits issued, experienced a decline of 35.2%. Following closely, the second-highest state in multifamily permits, Florida, saw a decline of 24.1%. California, the third largest multifamily issuing state, decreased by 29.8%.

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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Wood-Framed Home Share Decreased in 2023

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Wood framing remains the most dominant construction method for completed single-family homes in the U.S., according to NAHB analysis of 2023 Census Bureau data. For 2023 completions, 93% of new homes were wood-framed, another 7% were concrete-framed homes, and less than half a percent were steel-framed.

On a count basis, there were 930,000 wood-framed homes completed in 2023. This was a 3% decrease compared to the 2022 total. The wood-framed market share decreased to 93% in 2023, after it increased for three consecutive years, from 2019 (90%) to 2022 (94%). As noted above, steel-framed homes are relatively uncommon, with 3,000 housing completions in 2023, the same amount as the 2021 and 2022 completions.

Meanwhile, the concrete-framed market share increased from 6% in 2022 to 7% in 2023. On a count basis, there were 65,000 concrete-framed homes completed in 2023, up 3% from the previous year. This is the first increase after three straight years of declines (down 13% in 2020, 5% in 2021 and 11% in 2022).

Non-wood based framing methods are primarily concentrated in the South due to residential resiliency requirements. In 2023, concrete-framed homes made up 11% of all homes completed in the South. Additionally, approximately two-thirds of steel-framed homes completed in 2023 were in the South.

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Home Sizes: Demand versus Supply

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The share of new single-family homes built in the 1,600-3,000 square-foot range closely matches the share of buyers who want homes of that size, according to recent surveys from NAHB and the U.S. Census Bureau. The surveys show that 21% of buyers want homes with 1,600 to 1,999 square feet, and 22% of new single-family homes started in 2023 have that much floor space. In the next tier up, 38% of buyers want homes with 2,000 to 2,999 square feet, and 40% of new single-family homes fall within that size range.

Results on the square footage buyers want in their next home were published in the 2024 edition of What Home Buyers Really Want, based on a representative sample of 3,008 recent and prospective home buyers conducted in 2023. The size of homes started comes from NAHB tabulation of the recently released 2023 data file from the Census Bureau’s Survey of Construction.

Outside of the 1,600-3,000 square-foot range, the match between what buyers want and what builders provide is not as close. While 26% of buyers want homes under 1,600 square feet, only 16% of single-family homes started in 2023 were that small. And while 22% of new homes have at least 3,000 square feet, only 14% of buyers are looking for homes that large.

Part of the reason for the apparent mismatch, of course, is that builders are compensating for the existing stock of housing, much of which was built decades ago when homes tended to be smaller. According to the latest American Housing Survey (funded by HUD and conducted in odd-numbered years by the Census Bureau), a full one-third of existing homes in the U.S. have less than 1,500 square feet of floor space. Moreover, the median size of an existing single-family detached home is 1,800 square feet, compared to 2,200 square feet for single-family homes started in 2023 and the 2,067 square feet that home buyers say they want in the NAHB survey.

In other words, the median buyer wants a home that is 133 square feet smaller than the median new single-family home, but still 267 square feet larger than the median existing single-family detached home.

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HVAC in New Construction 2023

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Almost all new single-family homes that started construction in 2023 used either an air/ground source heat pump or a forced air system (without heat pump) for the primary heating system (98% in 2023), according to the Census’s Survey of Construction.  While this survey data does not separate the air source heat pump systems and ground heat pump systems (geothermals), another study discusses their usage in green building. Additionally, 17% of homes used a secondary type of heating equipment. 

Heating Systems

The type of heating system installed varies significantly by Census Division. In warmer regions of the country, air/ground source systems are more common with an 81% share in the South Atlantic and a 72% share in the East South Central. In colder regions, very few homes have air or ground-source heat pumps: only 7% of new homes started in New England and only 8% in East North Central. Forced air systems without heat pumps burn fuel to produce heat, while heat pumps transfer heat by moving air. Therefore, in extreme climates (below freezing), heat pumps can become less efficient due to the limited ambient heat available.

In general, the share of new homes using an air or ground-source heat pump as the primary means of providing heat has increased, going from 23% in 2000 to 45% in 2023. Meanwhile, the share relying on a forced air system without heat pumps has slipped, going from 71% to 53% in the same time frame.

Primary Fuel for Heating

The SOC also provides data on the primary fuel used to heat new single-family homes. Approximately 54% of new homes started in 2023 use electricity as the primary heating fuel, compared to 43% powered by natural gas, 3% using bottle or liquified petroleum gas (propane), and 0.1% using oil.

Heating fuel sources closely align with the types of heating systems used, with air and ground-source heat pumps running on electricity and most forced air systems without heat pumps using natural gas or propane. Consequently, the primary heating fuel source differs significantly by region across the country. For example, in New England only 10% of new homes used electricity as the primary heating source. In contrast, 83% of new homes started in the South Atlantic use it. Additionally, while most regions fall under 10% in their usage of propane, New England had a 29% share and East North Central had 11%.

Air Conditioning

In 2023, 98% of new single-family homes started had a central AC system, rising from 97.1% in 2022. This percentage has risen steadily since 2000 when only 85.5% of homes had a central AC system.

Though the share of new single-family homes started with central AC differs across the country’s nine Census divisions, the highest share is concentrated in the South region: 100% of homes started in the South Atlantic, East South Central, and West South Central divisions had central AC installed. Closely falling behind were the West North Central and Pacific Divisions, both at 98%. Trailing last were the Middle Atlantic (95%), East North Central (94%), Mountain (93%), and New England (89%) divisions.

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Private Residential Construction Spending Falls for Second Straight Month

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Private residential construction spending was down 0.3% in June, after a dip of 0.7% in the prior month, according to the Census Construction Spending data. Nevertheless, it remained 7.3% higher compared to a year ago.

The monthly decline in total private construction spending for June was largely due to reduced spending on single-family construction. Spending on single-family construction fell by 1.2% in June, following a dip of 0.6% in May. This marks the third consecutive monthly decrease. Elevated mortgage interest rates have cooled the housing market, dampening home builder confidence and new home starts. Despite this, spending on single-family construction was still 9.9% higher than it was a year earlier.

Multifamily construction spending inched up 0.1% in June after a dip of 0.6% in May. Year-over-year, spending on multifamily construction declined 7.4%, as an elevated level of apartments under construction is being completed. Private residential improvement spending increased 0.6% in June and was 10.4% higher compared to a year ago.

The NAHB construction spending index is shown in the graph below (the base is January 2000). The index illustrates how spending on single-family construction and home improvements have slowed down the pace since early 2024 under the pressure of elevated interest rates. Multifamily construction spending growth slowed down after the peak in June 2023.

Spending on private nonresidential construction was up 4.2% over a year ago. The annual private nonresidential spending increase was mainly due to higher spending for the class of manufacturing ($37.6 billion), followed by the power category ($13 billion).

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Share of Non-Conventional Financing Increased in 2023

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Nationwide, the share of non-conventional financing for new home sales accounted for 32.4% of the market per NAHB analysis of the 2023 Census Bureau Survey of Construction (SOC) data. This is a significant 4.3 percentage point increase from the 2022 share of 28.1%. As in previous years, conventional financing dominated the market at 67.6% of sales, albeit lower than the 2022 share of 71.9%.

Non-conventional forms of financing, as opposed to conventional mortgage loans, include loans insured by the Federal Housing Administration (FHA), VA-backed loans, cash purchases and other types of financing such as the Rural Housing Service, Habitat for Humanity, loans from individuals, or state or local government mortgage-backed bonds. The reliance on non-conventional forms of financing varied across the United States, with its share at almost 40% in West South Central but only 17.1% of new single-family home starts in the Middle Atlantic division.

Nationwide, cash purchases were the majority share of non-conventional financing of new home purchases, accounting for 14% of the market share, slightly up from 13% in 2022. NAHB survey based on builders reported that for 2024, all-cash sales are a higher share at 22%. FHA-backed loans accounted for 12%, whereas in 2022, it was only 8% of the market share. The share of VA-backed loans was at 4% market share in 2023, while Other Financing was 3% of market share.

Regionally, cash financing held the highest share in East South Central, where 24.6% of all homes started were purchased with cash. Except for the South Atlantic, West South Central, and the Pacific, cash purchases led non-conventional financing in the remaining six census regions. Cash purchases accounted for 22.0% in East North Central, 16.9% in New England, 12.3% in Mountain, 12.0% in Middle Atlantic, and 10.6% in West North Central region.   

FHA-backed loans accounted for the majority of all non-conventional financing in the West South Central division accounting for 20.8% of the homes started. This share has gone up considerably  from 12.9% in 2022. The New England division reported the lowest FHA-backed loans with only a share of 1.2% of the homes started in 2023.

VA-backed loans were most used in the South Atlantic division, which accounted for 5.9% of non-conventional forms of financing. In New England, none of the homes started used VA-backed loans in 2023.  

Other financing such as the Rural Housing Service, Habitat for Humanity, loans from individuals, state or local government mortgage-backed bonds was highest in East North Central where it was collectively 5.6% of market share, while Middle Atlantic division reported the lowest share at 0.9%.

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