Residential construction outperformed forecasts in the final month of 2021. Does that mean more inventory for the housing market in 2022?
Home building finished on a high-note in 2021, offering a glimmer of hope for fresh inventory for homebuyers in 2022.
The number of building permits issued for all residential construction (single-family and multifamily) increased 9.1% from November to December, finishing the year at a seasonally-adjusted annual rate of 1,873,000. According to the U.S. Census Bureau, permits were issued at the second-highest rate since 2006, just 10,000 short of the high mark set in January 2021.
Residential construction permits are a leading indicator of housing supply as they eventually become housing starts and new inventory.
For homebuyers, new inventory is key to reducing competition and price growth in another busy year for the housing market. Although the December report outperformed expectations, it’s hardly the sound of the cavalry coming to the rescue.
First, most of the construction growth in December came in the multifamily sector, which does little to help homebuyers. For example, permits for 2-4 unit homes increased 45.8% month-over-month while single-family permits increased just 2.0%.
Second, monthly construction data can be volatile as they are affected by a number of environmental factors including weather events, supply chain issues, and COVID disruptions. Single-family permits and completions saw a nice bump month-over-month, but the longer-term trends aren’t as strong.
Permits and housing starts are both down year-over-year by -8.5% and -10.9%, respectively. Single-family home completions are up 3.3% over the last year but have struggled to stay above the 1 million units per year mark that’s considered the threshold for strong growth.
Finally, with homebuilders fighting a three-headed monster of lot, labor, and material shortages, homes are taking longer to build. Before the pandemic, homes took on average 6-7 months to build. With the omicron variant further disrupting the market, implied completion time estimates have increased to 9.3 months.
That means the uptick in housing starts in November 2021 may not be finished until August 2022 – well past peak homebuying season.
To be clear, short term construction growth is better for homebuyers than a decline. But with less than 500,000 active listings to begin the year – the lowest supply on record to begin a year – the housing market is in dire need of inventory to balance demand from a wave of millennials that promise to sustain demand for the next several years.
The December construction report is at best a step in the right direction.