Customized market research can make the development and launch of a new product more streamlined and successful for your company by giving you insight into market needs and product satisfaction. There are also key economic indicators that can help your organization define opportunity and develop an informed strategy. One important factor is housing starts.
At a glance, housing starts data may seem relatively basic, but it can offer valuable insights into demographics driving demand, the health of the economy, as well as past and present housing and construction trends. From there, you can design a more robust and responsive strategy for launching and marketing your products to align with new home construction.
This data plays a significant role in understanding the overall state of the economy. Let’s delve into what housing starts are, who tracks this data, how to interpret it, and why it matters. We'll address break down what the current housing starts data indicates about the outlook for single family and multi-family starts in 2024 and 2025.
What are Housing Starts?
Housing starts simply refer to the number of new residential construction projects that have commenced during a particular time frame, typically measured monthly or annually. These projects encompass various types of housing, including single-family homes, multi-family buildings, and apartment complexes. For a multifamily structure, once construction has started, all units are counted as housing starts, which means a 25-unit complex would count as 25 housing starts.
Housing permits serve as a leading indicator of housing starts as building approval occurs before the physical construction begins. Similarly, housing completions are also tracked and serve as a lagging indicator denoting the number of homes completed through a defined period. The dynamic of these housing permits, starts, and completions is important to examine in times of economic volatility to indicate the severity of recession or growth.
Who Tracks Housing Starts?
The responsibility of tracking and reporting housing starts typically falls to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD). There are two surveys used to measure this data: the Building Permits Survey (BPS) and the Survey of Construction (SOC).
The BPS is collected on a monthly basis primarily from municipalities, counties, or townships. The SOC is much more complex in nature as this is a stratified random sample tracking an individual permit through project completion.
After sampling these 900 permit issuing offices across the U.S., the permits granted by each location are sampled and weighted by the number of units approved for that building construction. Any permit selected with 5 or more units is automatically selected. Whomever the permit may have been granted to (builder or owner, generally), is then contacted monthly by phone or in-person to track progress until the project is completed or abandoned.
The National Association of Home Builders (NAHB) indicates that typically 50% of permitted single family construction breaks ground the same month the permit is granted and 90% within two months.
How Should We Interpret Housing Starts Data?
Housing start data is valuable for various stakeholders, including policymakers, economists, real estate investors, manufacturers, and retailers. There are three categories that can define a housing start:
- Single Family Homes
- Multi Family (2-4 Units)
- Multi Family (5 or more units)
Each single-family start is counted as one unit while multifamily starts include the number of units included in that development. Here's how to interpret housing starts and understand their significance:
Housing starts are an indicator of…
Real Estate Market Health:
Housing starts can be an early indicator of the real estate market's health. A growing number of starts might suggest high demand for housing, potentially leading to increased property values.
Consumer Confidence:
Rising housing starts can be a sign of increased consumer confidence. When people are more optimistic about their economic prospects, they are more likely to invest in new homes, which, in turn, leads to higher housing starts.
Employment Opportunities:
The construction industry is a significant source of employment. An uptick in housing starts can create jobs, boost income, and contribute to economic stability.
Housing Supply and Demand:
Housing starts data also reveals whether the housing supply is keeping up with demand. An imbalance can lead to rising property prices and potential affordability issues.
Investment Opportunities:
Investors can use housing starts data to identify trends and make informed decisions. If starts are increasing, it may present opportunities for investing in construction-related industries, real estate, and even home improvement activities.
Why are Housing Starts an Important Economic Indicator?
In general, housing statistics provide insight into the state of the economy, as a steady supply of suitable housing options is key to sustaining economic expansion. Looking at the data from month to month, you can gauge how the economy is doing.
It’s well known that people are more likely to build new houses during times of economic growth. During economic stagnation or recession, individuals are less likely to invest in new construction, which impacts each aspect of the industry, including production.
Additionally, the housing industry impacts several other sectors, such as manufacturing, real estate, construction, employment, raw materials and banking. And while housing starts can be impacted by various external factors, thus not telling a complete story about economic health, they’re a critical piece of the puzzle.
What is the Relationship Between Interest Rates and Housing Starts?
For Single Family
Broadly speaking, there is an inverse relationship between interest rates and single-family housing starts. When interest rates are low, the cost of borrowing for homebuyers is reduced. This makes homeownership more affordable, which tends to stimulate demand for single-family homes. As a result, homebuilders will increase their construction of single-family units to meet this aggregate demand.
Low interest rates also improve housing affordability, making it easier for people to qualify for mortgages and purchase homes. This can lead to an increase in the number of single-family housing starts. In some cases, lower interest rates can also attract real estate investors looking for better returns on their investment, which can further drive the demand for single-family housing and influence construction.
For Multi-Family
The relationship between interest rates and multifamily housing starts is more complex. Multifamily housing attracts both renters and investors. When interest rates are low, it can make it more attractive for investors to purchase and develop multifamily properties for rental income.
Economic conditions, such as job growth and demographic trends, also play a significant role in multifamily housing starts. For instance, in a robust job market or areas with a high concentration of young professionals, there may be a sustained demand for multifamily units regardless of interest rate fluctuations.
What Does the Current Housing Starts Data Show?
Multifamily starts, measured as number of units in a building with 5 or more units, have declined as interest rates rise and disincentivize investment in new projects. Housing start data showed a seasonally adjusted annual average of 563,000 annual units (SAAR) starting in May of 2023 only to fall to 327,000 units (SAAR) in August.
This signifies the boom experienced through 2022 is slowing as the fed tries to cool the economy with monetary policy. In fact, August’s SAAR is the lowest we have seen since May of 2020 when the pandemic put a pause on the construction industry. In terms of single-family units, we are down from the 1.1 million mark seen throughout 2021 and 2022. August of 2023 showed 923,000 single-family starts (SAAR) as interest rates continue to make the cost of borrowing money a significant barrier for many looking to build.
Top Factors Driving the Pace of Housing Starts
Looking toward the future, here are a some variables to consider when evaluating housing start data:
- Interest Rates: The prevailing interest rates on mortgages can significantly influence the demand for housing. Lower interest rates often stimulate homebuying, leading to increased housing starts.
- Economic Conditions: The overall state of the economy, including factors like GDP growth, employment rates, and consumer confidence, can impact housing starts. A strong economy tends to support housing demand.
- Demographics: Population growth and demographic trends, such as the number of young adults entering the housing market or an aging population's housing needs, play a pivotal role in housing demand and, consequently, housing starts.
- Housing Affordability: Affordability factors, including home prices, household income, and the cost of living, can either encourage or discourage potential buyers, affecting housing starts.
- Regulatory Environment: Local, state, and federal regulations and policies, including zoning laws, building codes, and incentives for affordable housing, can have a substantial impact on housing starts.
- Consumer Sentiment: The sentiment and confidence of potential homebuyers and real estate investors can influence their decisions to purchase or invest in housing.
- Supply and Demand: The balance between housing supply and demand in a specific region can significantly affect future housing starts. A shortage of housing may lead to an increase in construction activity.
- Market Trends: Trends in home design, energy efficiency, and technology integration can shape future housing starts. Builders often adapt to meet changing consumer preferences.
- Urbanization: The trend toward urbanization and suburbanization can affect where housing starts occur, as well as the type of housing being constructed.
- Migration Patterns: Migration trends, both domestic and international, can impact housing markets. Areas experiencing high in-migration may see increased demand for housing.
Housing starts are a vital metric for understanding the economic landscape and the state of the housing industry. Whether you're an investor, a policymaker, or just a concerned homeowner, keeping an eye on housing starts can provide valuable insights into economic health and housing market dynamics. We have our own predictions for what the future might hold and this is an important factor in those determinations. By monitoring this data and interpreting its implications, you can make more informed decisions and stay ahead in an ever-changing housing market.
Using Housing Starts Data in Product Development
So, the question remains, what does historical housing starts data have to do with product development? For the building and home improvement sector, this data can be quite helpful.
By comparing year-over-year or month-over-month housing information, you get a sense of how demand and the economy is faring, along with the state of the construction industry. You can conduct a more tailored evaluation by breaking down the data into what types of houses or residential structures are being built and where.
- Are developers and contractors building more single-family residences, or erring toward multifamily units as the general public seeks affordable housing?
- In which regions is there likely to be higher business confidence—and, therefore, greater demand—among remodelers and contractors?
- If new single- and multi-family houses are being built at a lower rate, are more people turning to renovations or remodels of their existing home?
This is the type of publicly available data you’ll want to pull into discussions as your company starts to develop new products and materials for the home improvement and construction industries. It’s also particularly meaningful as your team develops marketing strategies and makes distribution decisions surrounding the launch of a new product.
- Should you focus on new homes?
- Single vs Multi-Family?
- What do homeowners and contractors want from specific products?
- Where are they learning about new products and purchasing new products?
- What improvements could be made to better meet their needs?
You may want to focus your attention on areas where the construction industry is thriving, as demonstrated by an influx of housing starts. Or you might have to adjust the pricing for a material or piece of equipment to reflect anticipated demand. Having the right data enables you to be flexible and make sound decisions about investments into new products as the economy ebbs and flows, impacting new construction along with it.
The U.S. Census Bureau has published highlights on 2022 new housing characteristics, which may provide you and your product development teams with further insights to aide your efforts.
Doing Due Diligence for Product Development
In general, historical housing starts data can help at various junctures during the product development process for companies targeting the home building industry. You can apply this data to guide business decisions regarding the best audience to target for sales and marketing, where and when customers are using products, and growth potential.
At The Farnsworth Group, we study several industry factors that impact product development, and we can help your organization understand implications to your business. From there, you can define valuable custom market research, providing you with the objective information you need to successfully develop and launch a new product. Further, download the Farnsworth Contractor Confidence Index, updated quarterly, for the latest pulse on how PROs are feeling about the state of construction and home improvement.
Written By Cy Gourlay
Cy has been a Project Director for clients’ custom market research projects since 2018. Prior to joining The Farnsworth Group, Cy collaborated on the Quarterly Census of Employment and Wages (QCEW) program for the Bureau of Labor Statistics. Based in the Denver area, Cy enjoys to play soccer, hike, ski, and attend live music events. Cy is also currently pursuing his M.B.A with a focus in Business Analytics from the University of Colorado - Denver.