'Single-family homebuilding: Resilient but rangebound' says Goldman Sachs

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Last week, Goldman Sachs analysts published their mid-year housing outlook. ResiClub has already covered Goldman Sachs’ updated outlook for U.S. existing home sales and U.S. home prices. Today, we’ll show their view on new construction.

Goldman Sachs’ take on single-family homebuilding 👇

“Single-family homebuilding: Resilient but rangebound. Two years ago, we argued that extreme tightness in the housing market would dampen the hit to housing activity from higher interest rates. Our analysis suggested that when the homeowner vacancy rate is low—as it was then and still is today—the sensitivity of housing starts to mortgage rates is sharply reduced. Because financing costs are a small share of construction costs, homebuilders normally slow construction when interest rates increase in anticipation of weaker demand, not as a result of higher costs. But when housing supply is tight, like it is today, housing demand is likely to remain strong despite higher interest rates, and homebuilders can keep building because they should have little fear that homes will sit unsold after completion. And indeed…single-family housing permits [in April 2024] were 13% above 2019 levels in April. However, the same constraints on homebuilding that led to the housing shortage and reduced its sensitivity to rates also limit the upside to single-family starts. Homebuilders continue to face a shortage of available plots to build on—in part due to stringent land-use regulations—and a shortage of construction workers. Homebuilding has risen the least over the last four years in the metro areas with the most restrictive land-use regulations, a relationship that holds even after accounting for home price growth. The number of residential construction workers remains extremely low relative to the number of ongoing construction projects. The shortage of construction workers and continued—albeit less extreme—supply chain disruptions have contributed to sharply longer build times,” wrote Goldman Sachs analysts in their June report.

Goldman Sachs analysts thoughts on homebuilder buydowns, profit margins, and what would happen to builders if buyer demand falls further👇

“The increased use of mortgage rate buydowns—temporary interest rate reductions offered alongside the purchase of a new home to ease borrowers into the full mortgage payment for the beginning of a loan term—could signal weakening homebuying demand amidst strained affordability. While there is limited information about the prevalence of rate buydowns, loan-level information from Ginnie Mae suggests that roughly a third of new home sales feature a rate buydown. We’re not too concerned by the prevalence of rate buydowns for two reasons. First, homebuyers receiving a buydown must qualify for the full interest rate, meaning that the buyers would still be able to afford the home without the buydown. Second, even though homebuilders bear the cost of the buydowns, homebuilder margins are still quite elevated, which suggests that they have room to lower prices if demand softened. As a result, buydowns appear to be more of a marketing tool to offset the salience of high mortgage rates than an infusion of affordability in response to weaker demand,” wrote Goldman Sachs analysts in their June report.

Goldman Sachs’ take on multifamily construction 👇

“While single-family homebuilding will likely remain elevated, multifamily construction is likely to fall further this year and multifamily starts are likely to remain depressed around current levels. The backlog of multifamily units already under construction is 50% greater than in 2019, and the pipeline for new projects has already begun to narrow. As a result of fewer multifamily starts, we expect total housing starts to total 1.38 million in 2024 vs. 1.42 million in 2023,” wrote Goldman Sachs analysts in their June report.

Goldman Sachs outlook for single-family housing starts and multifamily starts 👇

On Wednesday, we learned that U.S. home prices as measured by the Zillow Home Value Index, rose +0.8% month-over-month between the April reading and the May reading. Seasonally speaking, we’re at the tail end of the strongest reporting window every year for appreciation (see chart below).

U.S. home prices are +3.9% year-over-year.

And U.S. home prices are +2.2% above the 2022 peak.

While national home prices are still rising, much of those gains are occurring in tight resale markets in the Northeast, Midwest, and Southern California.

Indeed, a few markets saw a negative month-over-month print from April to May. These markets include Naples, FL; Cape Coral, FL; North Port, FL; and Punta Gorda, FL.

A negative print month-over-month here (i.e. April to May) usually forewarns of bigger declines later in the year. I call it "correction mode."

Austin is one market that has been passing through a home price correction that looks like it could be poised for more give up later this year.

According to Zillow, there are now a number of "buyers' markets" across Gulf states like Texas, Louisiana, Mississippi, and Florida. Some of these resale markets have experienced additional affordability shocks due to spiking home insurance premiums, competition from builders making affordability adjustments (i.e., price cuts/buydowns), and strained pricing fundamentals that emerged during the Pandemic Housing Boom’s overheating.

ResiClub PRO members got these 3 additional research articles last week:

Housing market inventory dynamics in 800+ metros and 3,000+ counties

What the new Fortune 500 list tells us about the state of U.S. housing

Meet the tightest housing market in America: Connecticut

Nothing in this newsletter is investment advice. Please do your own research.