New construction increases in February

The increase comes as builders report they are more optimistic about the market.

Builders showed renewed optimism in February, pulling out additional permits and starting construction of more housing units, the Census Bureau and the Department of Housing and Urban Development reported today (Thursday).

Permits rose 13.8% to an annual rate of 1.5 million, while January's figure was revised slightly upward. Building starts rose 9.8% to an annual rate of 1.45 million from the previous month's revised rate of 1.32 million.

However, activity levels remained about 18% below a year ago. Much of the gains came in multifamily construction. Increases were strongest in the South and West.

“The increase in new starts this month reflects recovering homebuyer demand and improving builder confidence,” said Lisa Struthbent, chief economist at Bright MLS. “However, recent banking industry troubles could undo the momentum that has been building in the new housing sector.”

Builder confidence rose two points in March, according to the National Association of Home Builders/Wells Fargo Housing Market Index released Wednesday. It was the third consecutive monthly increase in builder sentiment.

“Even as builders continue to grapple with stubbornly high construction costs and disruptions to the supply chain for materials, they continue to report pent-up demand as buyers wait for interest rates to fall and turn more to the new home market due to a shortage of existing inventory,” said NAHB Chairwoman Alicia Hui, a custom home builder and developer in Birmingham, Alabama. “But given recent concerns about instability in the banking system and interest rate volatility, builders are very uncertain about the near- and medium-term outlook.”

The monthly survey found that builders are relying on incentives to sell homes, with 31% reporting they lowered prices in March, the same as February but lower than reported at the end of last year.

“Conditions are still considered ‘poor’ overall, but the improvement signals that builders are feeling cautiously optimistic,” said Odette Cauchy, deputy chief economist at insurance company First American, before the construction data was released.

“One driver behind higher builder sentiment is the lack of existing home inventory available for sale,” Koshy added. “The lack of existing home inventory means more and more buyers can turn to the new home market. And while three months of higher homebuilder sentiment may signal a turning point for single-family home construction, builders continue to face headwinds in the form of higher construction costs and a limited affordable housing market.”

Kelly Mangold of RCLCO Real Estate Consulting, said, “On a positive note, the number of existing homes on the market has reached record lows, giving new homes less competition – and often one of the only options for motivated buyers.”

“We are currently in a period of economic uncertainty, and we may see improvements as the year progresses, or starts could experience a sustained decline if we enter a real recession,” she said.