Homebuilders broke ground on more new housing units in October and secured more permits for future development, but the uptick in activity remains "below trend," according to one expert.
New residential construction, including single-family and multifamily homes, increased 1.9% in October from the month before to 1.372 million units on a seasonally adjusted basis, according to data from the Census Bureau released Friday. While that's down 4.2% versus the previous year, it's above the forecast of 1.350 million units from economists surveyed by Bloomberg.
Authorized residential permits — a gauge of future activity — gained 1.1% to 1.487 million units in October from the revised September rate of 1.471 million units — driven by a slight bump in multifamily. Still, that’s down 4.4% from the October 2022 rate, but higher than the forecast of 1.450 million units economists surveyed by Bloomberg were expecting.
"The latest rebound in housing starts was from an increase in multifamily units, a sector experiencing a renaissance in supply," Jeffrey Roach, chief economist at LPL Financial, wrote following the release. "Despite the increase last month, both permitting activity and home building are below trend, providing more upside potential in the coming year."
Starts on multifamily structures with five or more units landed at 382,000 for October, slightly lower than the previous month of 383,000 units. Permits to start construction on multifamily structures with five or more units landed at 469,000 units in October, just 2% higher than the previous month of 459,000 units.
Multifamily construction isn't as robust after picking up in the last year, contributing to a surge in new supply, with 558,000 units completed in 2023, according to new analysis by CoStar Group. That has slowed down rent growth nationwide.
Data from RealPage showed that rent growth has held steady at a flat 0.1% annually for a second consecutive month in October.
"Builders respond to higher prices. Higher prices stimulate supply," Orphe Divounguy, senior economist at Zillow, told Yahoo Finance. "And because rent growth is slowing, that's the reason why builders will take a step back in terms of building more apartments."
Separately, among 56 apartment developers, investors and operators, they are expecting a big drop in starts over the next 12 months, per John Burns Research & Consulting data. About 25% expect apartments to fall by about 50%, while very few expect growth ahead.
On the single-family side, starts in October increased 0.2% to 970,000 from September’s revised figure of 968,000. Authorizations to start new single-family development were up 0.5% above September’s revised figure of 963,000.
"Single family [starts] is a little bit more challenging because you have a situation where you still have more demand than you have supply," Divounguy, senior economist at Zillow, told Yahoo Finance. "Builders still have a lot of projects to complete."
Public homebuilders like D.R. Horton Inc. (DHI) signaled in its earnings last week that the uncertainty around mortgage rates will impact the business. As a response, the company’s forward guidance for next year stayed on the side of caution.
Read more: Mortgage rates at 20-year high: Is 2023 a good time to buy a house?
Smaller private homebuilders are also making changes to their strategy. The National Association of Home Builders (NAHB) is forecasting a 5% increase for single-family starts in 2024.
"Small single digits [forecasts] is something that is reasonable to expect for construction under the current conditions," Veneta Dimitrova, senior US economist at Ned Davis Research, told Yahoo Finance. "We don't see a recession and interest rates moderate from here along with inflation."
More homes to come
Wall Street is raising their forecasts for housing construction. UBS analysts, for instance, expect single-family housing starts to end this year slightly higher at 914,000 compared to the previous forecast of 909,000. For 2024, the expectations for single-family housing starts are 969,000, up from the previous forecast of 964,000.
Last, 2025 is expected to see a bigger increase in housing activity with expectations of 1.008 million single-family units, up from the previous forecast of 1.002 million units.
"We continue to believe the large, public homebuilders are positioned to gain outsized share over the near term given tight existing home inventory, the ability to offer attractive financing and incremental private builder challenges procuring land, labor, materials and now financing," John Lovallo, US homebuilders and building products equity research analyst at UBS, wrote in a note to clients.
Meanwhile, the story could be different for apartments, which experienced a surge in new supply this year.
"We also trim our multifamily housing starts forecasts to reflect market digestion of current projects," Lovallo added.
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Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.