Industry outlook: A downturn quantified at IBS

A big drop, a big recovery and other trends from NAHB's chief economist.

A highly anticipated construction market forecast calls for declines of more than 20 percent for both single-family and multi-family residential construction in 2023, followed by a bounce-back year in 2024. 

“With interest rates projected to normalize in the second half of 2023 as the Federal Reserve taps the brakes in its fight against inflation, the pace of single-family construction will bottom out in the first half of 2023 and begin to improve in the latter part of the year,” said Robert Dietz, chief economist of the National Association of Home Builders (NAHB), during a housing and economic outlook press briefing at the 2023 International Builders’ Show. “This forward momentum will lead to a calendar year gain for single-family starts in 2024.”

Robt Deitz
Robert Dietz, chief economist of the National Association of Home Builders

Last year, 2022, was the first year that single-family starts declined in 11 years, falling an estimated 12% to 999,000 units.

NAHB is projecting that single-family production will fall to 744,000 units in 2023 before rebounding to a 925,000 annual pace in 2024. The 2022 and 2023 declines appear dramatic because production was running at a very solid level above a 1.1 million annualized pace through the first quarter of 2022 before beginning a steep decline as mortgage rates rose rapidly and the housing market weakened.

The NAHB's numbers

Single-family starts
2021; 1,131,000 (+13%)
2022; 999,000 (-12%)
2023; 744,000 (-26%)
2024; 925,000 (+24%)

Multi-family starts
2021; 474,000 (+21%)
2022; 545,000 (+15%)
2023; 391,000 (-28%)
2024; 374,000 (-4%)

On the multifamily front, construction boomed in 2022, up an estimated 15% from the previous year to 545,000 apartment starts. Because of slowing rent growth, rising unemployment, tighter financing and a decades-high level of inventory in the pipelines, supply constraints that have caused a large backlog of projects, NAHB is projecting that multifamily starts will fall 28% this year to a 391,000 total and will stabilize in 2024 at about 374,000 starts. There are currently more than 940,000 apartments under construction, the highest total since 1973.

The remodeling sector remains on solid ground and will do better than the single-family and multifamily markets during the housing downturn. Residential remodeling activity is estimated to increase 7% on a nominal basis in 2022 following a growth rate of 13% in 2021 as people continue to use their home for more purposes such as offices, schools and gyms. However, with housing demand weakening, remodeling growth is expected to slow, posting a nominal 5% gain this year and a 4% increase in 2024.

Mortgage rates, Dietz said, have likely peaked, and are are expected to decline in 2023 and 2024, falling below 6% by 2024. “Falling rates will set the stage for a housing rebound later in 2023, and a better affordability environment will lead to a recovery of housing demand,” said Dietz.

The medium-term outlook calls for single-family home building to lead the recovery later in 2023 and going into 2024, as interest rates fall back on a sustained basis from peak rates. But while demand will return, supply-side issues will become worse—a lack of lots, growing concerns about acquisition, development and construction financing, and building material constraints.

Nonetheless, a structural housing deficit of 1.5 million residences, favorable home buyer demographics and a better interest rate environment will lead to a solid period for home building during the back half of the decade. Single-family home building will need to exceed 1.1 million starts per year in order to reduce a deficit that arose because of underbuilding in the prior decade.

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