We Now See a Sharper Housing Starts Decline in 2023-24

We previously expressed concern that deteriorating homeownership affordability would slow new home sales and result in fewer housing starts in 2023 with a rebound in 2024. However, affordability has worsened since then with the average 30-year fixed-rate mortgage nearing 6% compared with 2.93% one year earlier. Signs of slowing housing demand are emergent. Purchase mortgage applications have slipped below prepandemic levels, year-to-date new home sales (through April) decreased 13% year over year (with April sales down 27%), and both homebuilder and homebuyer sentiments have soured.

We now project starts to decrease 10% in 2023 to 1.435 million units and decline roughly 10% in 2024 to 1.3 million units, which is about in line with new home production in 2018-19. Aside from the Great Recession, other housing downturns over the last 50 years had seen starts decline to 1.0-1.1 million units. However, there’s currently a housing deficit in the United States (we estimate a 3.5-million-unit shortfall), and we expect supply of existing for-sale homes will remain tight as homebuyers over the last decade have been well qualified (due to restrictive lending standards), which should limit foreclosure risk, and homeowners with lower mortgage rates are disincentivized from selling. As such, we see a higher floor for starts in the current environment.

We expect affordability will improve over the next two years as mortgage rates subside and home prices become more tenable. We project starts will rebound to 1.55 million units by 2026 and average around 1.45 million units toward the end of the decade. We project 14.7 million cumulative starts between 2022-31, which is about 5% lower than our prior forecast. However, our lower population growth outlook accounts for 350 basis points of this decline.