Throughout the pandemic, a bright spot in the American economy has been housing, which had incredible growth as buyers looking for more space in the suburbs took advantage of historically low interest rates. Homebuilders responded, pushing starts and permits above the projected 1.5 million long-term equilibrium rate between supply and demand during the fourth quarter of 2020.
But that momentum came to a sudden end in February as housing starts fell 10.3% month over month to 1.4 million and permits fell 10.8% to just under 1.7 million, according to government data released on Wednesday. Some of this decline, particularly in starts, was to be expected as severe winter weather ravaged much of the nation, limiting the ability to build.
The decline in permits — an indicator of future activity — was particularly alarming for the industry.
But it is the significant decline in permits — an important indicator of activity to come — that is more alarming for the industry. A closer look at the numbers shows that the decline was particularly acute in the multifamily market, where permits fell 19.2% month over month and starts dropped 15.9%.
Some of this decline could be explained by shifting market demands as builders realigned their focus to the red-hot single-family market. But the single-family market declined as well, both in permits, down 3.6% month over month, and in starts, down 6.4%.
While weather events and the natural cooling of an extraordinarily hot market could explain the fall-off in the market, there are some headwinds that the industry faces.
Lumber prices, for example, have been skyrocketing, with the U.S. producer price index for lumber and plywood up 50.9% year over year as the pandemic and wildfires disrupted supply chains. Homebuilders also cited costs for land and labor as significant headwinds limiting supply.
The significant decline in both permits and starts is noteworthy, but we believe that the overwhelming demand and lack of inventory will lead to a recovery in the second quarter of the year. Not only will improving supply chains help ease the cost of raw materials, but the return to normalcy as vaccines are distributed will fuel the economy and continue to drive demand for housing.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.