At the beginning of 2022, residential construction was humming along as demand was still fueled by the pandemic buying frenzy. But, that’s changing: During the first six months of 2023, both permits and started units recorded significant year-over-year drops.
Residential construction data for the first half of the year shows that homebuyers are going through one of the most difficult times — but their plight might get even worse. While mortgage rates make home seekers shudder, falling permit and housing start numbers could add insult to injury. It’s likely that potential buyers will be looking at even tighter inventory in the not-so-distant future.
A trend that started taking shape when analyzing historical data for the 2012-2022 decade appears to be deepening this year. Completed units (unlike permits and starts) kept increasing during the first two quarters of 2023. However, shortages of materials and higher borrowing costs — which were already plaguing developers — might eventually derail this segment, as well, delaying homeownership for even more aspiring buyers.
Here are the report’s main takeaways:
- National Level: The number of permits dropped in the first half of 2023 compared to the same period in 2022. At -22.2%, the West recorded the biggest drop, followed by the Northeast with -21.7%.
- Similarly, both across the country and in each region, the number of total started units decreased in the first half of 2023. The West saw the biggest drop (-21.89%).
- Total completed units, on the other hand, recorded a significant jump: The Northeast and Midwest led the way, with increases of more than 25% and 13%, respectively.
- State Level: The total number of new housing permits dropped in all states with only six exceptions: Alabama, Connecticut, Kentucky, New Hampshire, Rhode Island, and Vermont.
- However, permits for single-family units dropped almost across the board and the increases were due to multi-family issuances.
- Hawaii was the only state with a significant increase in the number of single-family permits issued (21.4%). The only other state with a positive change was New Jersey, where permits rose by a modest 0.3%.
- Metro Level: The total number of permits dropped in the majority of U.S. metros, with only 90 of the 384 metro areas (most of them small or mid-sized) recording increases.
- Single-family permits went up in 52 of the 384 (13.5%) metros, with Trenton-Princeton, NJ; Boulder, CO; Walla Walla, WA; and Michigan City-La Porte, IN doubling the number of permits compared to the first six months of 2022.
From Nearly 900,000 to 742,500, Permits Fall 17.5% in the 1st Half of 2023 Compared to Same Period Last Year
Whether we’re analyzing single-family units, two- to four-unit buildings or multi-family projects, the number of permits fell almost uniformly across the country, with a few exceptions at the state and metro levels.
It seems that multiple factors are at play here, creating a web of opposing forces that have transformed the housing market in a complex game of tug-of-war. Initially, historically high (and increasing) mortgage rates forced home sellers out of the market and into their famous golden handcuffs, making the inventory of existing homes for sale plummet. This then created opportunities for developers, as homebuyers became increasingly interested in new builds.
But now, following a new rate hike and the prospect of falling interest in multi-family housing, a slow-down in permitting activity seems only natural. According to a Reuters report:
The biggest drop was recorded by permits for units in two- to four-unit buildings. This type of housing saw a 36% Y-o-Y decrease in permits, going from 26,800 in the first six months of 2022 to 17,200 permits in the first half of this year. Single-family building permits fell 21%, while multi-family permits declined 12.7%.
With drops of 22.2% and 21.7%, respectively, it was the West and the Northeast that saw the most significant contractions in their numbers of building permits. Housing starts lost the most ground again in the West. Coupled with the fact that completed units here saw one of the smallest increases, it seems as though buyers in the area have the cards stacked against them.
At the same time, the densely populated South recorded the smallest drop in permits, as well as the smallest decline in starts for housing projects. And, although it had the smallest year-over-year increase in completed units, these numbers show that housing development in the South is more resilient.
Number of Permits Rises Only in Connecticut, New Hampshire, Kentucky, Rhode Island, Vermont & Alabama
In the first half of 2022, an impressive 30 states saw year-over-year increases in their numbers of permits. Sustained by the strong, pandemic-fueled demand for housing, developers were eager to cover the gap between supply and demand.
However, this year, worsening financial conditions and the volume of existing new builds that developers have not unloaded yet have weakened the pace of both permitting activity and housing starts.
Connecticut led the group with a 31% jump in its total number of permits. But, like in the other five states that saw increases in permitting activity, its growth came exclusively from the positive change in multi-family permits. More precisely, in Connecticut, single-family permits dropped 28.4% and permits for two- to four-unit buildings fell 26.2%. Even so, the 140% jump in multi-family was more than enough to turn things around.
Meanwhile, permits for single-family homes decreased almost across the board, with only two states breaking the trend. Hawaii was the only state with a significant increase in the number of single-family permits issued (21.4%). The only other state where permits for single-family homes didn’t fall was New Jersey, which saw a much more modest 0.3% increase.
Alaska (-60%), followed by Wyoming (-44%), Utah (-41%) and Washington D.C. (-40%) recorded the biggest drops in permits for single-family homes.
Most Metros Record Year-Over-Year Drops in Housing Permits
In the first half of 2022, only 22 of the 56 large U.S. metros had recorded Y-o-Y drops in their numbers of housing permits. What’s more, the number of large metros with contracting permits had always hovered between 20 and 30 in the previous (full) years, going back as far as 2015.
But, the first half of 2023 was a game changer: Of the large metros, most (43 out of 56) recorded drops in permits in the first half of 2023 compared to the same period in 2022.
This supports what the data at the national, regional and state levels also shows: Increasing borrowing costs and mortgage rates — coupled with many more homeowners holding on to their homes (and their low rates) and an all-encompassing financial insecurity — cause the housing market to lose its momentum.
Of the metros that did see their number of permits increase, most were small metros where permits for a couple of hundred units or even several dozen units in multi-family buildings led to impressive, eye-catching year-over-year jumps. That said, this makes the few large markets where permits increased really stand out.
The large metro with the biggest increase in permits was San Jose-Sunnyvale-Santa Clara, CA. Here, the total number of permits increased 38.5% in the first half of 2023 compared to the first six months of 2022. Not to be outdone, Louisville-Jefferson County, KY-IN was the only other large metro with an increase higher than 30%.
Similar to numbers at the national level, the numbers of permits for single-family homes fell in most metros, regardless of size. Permits rose in only 52 metros, with small markets like Trenton-Princeton, NJ; Boulder, CO; Walla Walla, WA; and Michigan City-La Porte, IN seeing the number of permits double compared to the first six months of 2022.
Andra Hopulele is a Senior Real Estate Writer at Point2.
Andra Hopulele, Special to the Daily Press
