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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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Gains for Townhouse Construction

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Year-over-year gains for townhouse construction continued during the third quarter of 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 third quarter of 2024, single-family attached starts totaled 47,000, matching the highest quarterly count for townhouse construction since mid-2006. Over the last four quarters, townhouse construction starts totaled a strong 177,000 homes, which is 20% higher than the prior four-quarter period (148,000). Townhouses made up 18% of single-family housing starts for the third quarter of the year, a data series high.

Using a one-year moving average, the market share of newly-built townhouses stood at 17.4% of all single-family starts for the third quarter. With recent gains, the four-quarter moving average market share remains 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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Student Housing Construction Investment Rises in the Third Quarter of 2024

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Private fixed investment in student dormitories increased by 2.2% to a seasonally adjusted annual rate (SAAR) of $3.9 billion in the third quarter of 2024. This rise follows a 7% decrease in the prior quarter. However, private fixed investment in dorms was 1.8% lower than a year ago, as the elevated interest rates place a damper on student housing construction.  

Private fixed investment in student housing experienced a surge after the Great Recession, as college enrollment increased from 17.2 million in 2006 to 20.4 million in 2011. However, during the pandemic, private fixed investment in student housing declined drastically from $4.4 billion (SAAR) in the last quarter of 2019 to a lower annual pace of $3 billion in the second quarter of 2021, as COVID-19 interrupted normal on-campus learning. According to the National Student Clearinghouse Research Center, college enrollment fell by 3.6% in the fall of 2020 and by 3.1% in the fall of 2021.  

Since then, private fixed investment has rebounded, as college enrollments show a slow but stabilizing recovery from pandemic driven declines. Effective in-person learning requires college students to return to campuses, boosting the student housing sector. Furthermore, the demand for student housing is growing robustly, because total enrollment in postsecondary institutions is projected to increase 8% from 2020 to 2030, according to the National Center for Education Statistics. 

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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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Construction Job Openings Fall in September

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After a period of slowing associated with declines for some elements of residential construction, the count of open construction sector jobs trended lower in the September data, per the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS). The data indicates the demand for construction labor market remains weaker than a year ago.

In September, after revisions, the number of open jobs for the overall economy declined from 7.86 million to 7.44 million. This is notably smaller than the 9.31 million estimate reported a year ago and a clear sign of a softening aggregate labor market. Previous NAHB analysis indicated that this number had to fall below 8 million on a sustained basis for the Federal Reserve to feel more comfortable about labor market conditions and their potential impacts on inflation. With estimates now remaining near 8 million for national job openings, the Fed has begun a credit easing cycle should continue lowering rates.

The number of open construction sector jobs fell from a revised 328,000 in August to a softer 288,000 in September. Elements of the construction sector slowed in prior months as tight Fed policy persisted. The September reading of opening, unfilled construction jobs is lower than that registered a year ago: 422,000.

The construction job openings rate fell back to 3.4% in September and continues to trend lower.

The layoff rate in construction edged higher to 2.1% in September after a 2% rate in August. The quits rate in construction decreased to just 1.4% in September as job churn slowed.

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Declines for Residential Construction Loans

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During the second quarter of 2024, the volume of total outstanding acquisition, development and construction (AD&C) loans posted the largest year-over-year percentage decline since 2012, as interest rates remain elevated before the beginning of the Fed cutting short-term interest rates in September. AD&C loan conditions will improve as the Fed progresses in its policy easing cycle.

The volume of 1-4 unit residential construction loans made by FDIC-insured institutions declined 3.5% during the second quarter. The outstanding stock of loans declined by $3.3 billion for the quarter. This loan volume retreat places the total stock of home building construction loans at $92 billion, off a post-Great Recession high set during the first quarter of 2023 ($105 billion). The decline in loan volume is holding back private builder home construction and acting as a limiting factor for home builder sentiment.

On a year-over-year basis, the stock of residential construction loans is down more than 10%, the largest year-over-year decline since 2012. This contraction for construction financing is a key reason home builder sentiment moved lower at the end of 2023, even as building activity accelerated, propelled by larger builder activity.

It is worth noting the FDIC data represent only the stock of loans, not changes in the underlying flows, so it is an imperfect data source. Lending remains much reduced from years past. The current amount of existing residential AD&C loans now stands 55% lower than the peak level of residential construction lending of $204 billion reached during the first quarter of 2008. Alternative sources of financing, including equity partners, have supplemented this capital market in recent years.

The FDIC data reveal that the total decline from peak lending for home building construction loans continues to exceed that of other AD&C loans (nonresidential, land development, and multifamily). Such forms of AD&C lending are off a smaller 7% from peak lending. For the second quarter, the outstanding stock of these loans was approximately unchanged.

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Private Residential Construction Spending Falls for Third Straight Month

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Private residential construction spending fell 0.3% in August, according to the Census Construction Spending data. Nevertheless, it remained 2.7% higher compared to a year ago.

The monthly decline in total private construction spending for August was largely due to reduced spending on single-family and multifamily construction. Spending on single-family construction fell by 1.5% in August. This marks the fifth consecutive monthly decrease. The rising new single-family home inventory and expectations for lower interest rates both weight on new home building. Despite these challenges, spending on single-family construction was still 0.8% higher than it was a year earlier.

Multifamily construction spending inched down 0.4% in August after a dip of 0.3% in July. Year-over-year, spending on multifamily construction declined 7.5%, as an elevated level of apartments under construction is being completed. Private residential improvement spending increased 1% in August and was 9.4% higher than 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 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 3.6% over a year ago. The annual private nonresidential spending increase was mainly due to higher spending for the class of manufacturing ($36.4 billion), followed by the power category ($8.8 billion).

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Rebound for Construction Job Openings

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After a period of slowing associated with declines for some elements of residential construction, the count of open construction sector jobs bounced back in the August data, per the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS). However, construction job openings remain slightly lower compared to a year ago.

In August, after revisions, the number of open jobs for the overall economy increased slightly from 7.71 million to 8.04 million. This is notably smaller than the 9.36 million estimate reported a year ago, but the monthly gain is a sign of a somewhat resilient labor market. Previous NAHB analysis indicated that this number had to fall below 8 million on a sustained basis for the Federal Reserve to feel more comfortable about labor market conditions and their potential impacts on inflation. With estimates now remaining near 8 million for national job openings, the Fed has begun a credit easing cycle.

The number of open construction sector jobs rebounded from a revised, soft reading of 232,000 in July to 370,000 in August. Elements of the construction sector slowed in prior months as tight Fed policy persisted. However, with the August rebound for open construction sector jobs, the number of job openings is roughly flat compared to the year-prior estimate of 386,000 in August 2023.

The construction job openings rate also increased, rising to 4.3% in August after several months of weaker readings.

The layoff rate in construction increased to 2.0% in August after a 1.9% rate in July. The quits rate in construction decreased slightly to 2.1% in August from 2.2% in July.

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Price Growth for Inputs to Residential Construction Slows in August

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Prices for inputs to new residential construction, excluding capital investment, labor and imports decreased 0.1% in August according to the most recent Producer Price Index (PPI) report published by the U.S. Bureau of Labor Statistics. Compared to a year ago, this index was up 0.8% in August after a 1.8% increase in July. The inputs to new residential construction price index can be broken into two components­—one for goods and another for services. The goods component increased 0.2% over the year, while services increased 1.9%. For comparison, the total final demand index increased 1.7% over the year in August, with final demand goods flat and final demand services up 2.6% over the year.

Input Goods

The goods component has a larger importance to the total residential inputs price index, around at 60%. The price of inputs to residential construction, goods, remained flat in August after increasing 0.1% in July. The input goods to residential construction index can be further broken down into two separate components, one measuring energy inputs with the other measuring goods less foods and energy inputs. The latter of these two components simply represents building materials used in residential construction, which makes up around 93% of the goods index. Prices for inputs to residential construction, goods less food and energy, were up 1.6% in August compared to a year ago. This year-over-year growth has come down since April, when it was at 2.5% and remains well below the growth in August of 2022, when it was at 14.7%.

The graph below focuses on the data since the start of 2023 for residential goods inputs. Energy prices have retreated over the past year, with only two periods of growth in 2024.

Input Services

Prices of inputs to residential construction, services, fell 0.2% in August after remaining flat in July. The price index for service inputs to residential construction can be broken out into three separate components, a trade services component, a transportation and warehousing services component, and a services less trade, transportation and warehousing component. The most vital component is trade services (around 60%), followed by services less trade, transportation and warehousing (around 29%), and finally transportation and warehousing services (around 11%).

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Apartment Construction Time Averaged 20 Months in 2023

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The average length of time to complete construction of a multifamily building after obtaining authorization was 19.9 months in 2023, according to the 2023 Survey of Construction (SOC) from the Census Bureau. The permit-to-completion time inched up 0.1 months in 2023, after an increase of 2.3 months in 2022, as the ongoing skilled labor shortage and supply chain issues were still challenging the industry.

The average time to build multifamily homes varies with the number of units in the building. The more units, the more time required to build. In 2023, buildings with 20 or more units took the longest time,22 months, to build after obtaining authorization. Properties with 10-to-19 units required 21.5 months. However, 2-to-4 unit buildings came in at 18.7 months, which took longer time than 5-to-9 unit buildings (16.9 months).

Compared to 2019, pre-pandemic, only buildings with 5 to 9 units took a similar time to complete. The construction process required 3.3 more months to complete multifamily buildings with 2-to-4 units, 2.8 months more for 10-to-19 unit buildings, and 3 months longer to finish for properties with 20 or more units.

The 2023 SOC data also shows a significant regional variation in the average construction duration of multifamily buildings. The West had the longest time from authorization to completion at 20.9 months, followed by the Northeast at 20.8 months, and then the South with 19.5 months. The shortest permit-to-completion period happened in the Midwest with 17.3 months.

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