Question #8 for 2023: How much will Residential investment change in 2023? How about housing starts and new home sales in 2023?

Jan 3

Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2023. Some of these questions concern real estate (inventory, house prices, housing starts, new home sales), and I’ll post thoughts on those in the newsletter (others like GDP and employment will be on my blog).

I'm adding some thoughts, and maybe some predictions for each question.

8) Residential Investment: Residential investment (RI) was a drag on growth in 2022 as the housing market slowed sharply. Through November, starts were down 1.2% year-to-date compared to the same period in 2021. New home sales were down 15.2% year-to-date through November. Note: RI is mostly investment in new single-family structures, multifamily structures, home improvement and commissions on existing home sales. How much will RI change in 2023? How about housing starts and new home sales in 2023?

First a graph of RI as a percent of Gross Domestic Product (GDP) through Q3 2022:

Real residential investment (RI) decreased at a 27.1% annual rate in Q3. We don't have the data yet for Q4 2022 yet, but real RI will be down sharply in 2022 compared to 2021.

The second graph shows single-family and multi-family housing starts through November 2022. Year-to-date, total starts are down 1.2% compared to the same period in 2021 and will finish the year around 1.55 million total starts (down from 1.60 million in 2021). Note that the weakness in 2022 was in single family starts (red). Single family starts year-to-date are down 9.7%, whereas multi-family starts (5+ units) are up 17.8% YTD.

The third graph shows New Home Sales since 1963 through November 2022. The dashed line is the November sales rate. Year-to-date, new home sales are down 15.2% compared to the same period in 2021 and will finish the year around 640 thousand (down from 771 thousand in 2021).

Here is a table showing housing starts and new home sales since 2005. Note that starts and new home sales declined sharply for several years following the housing bubble. Since I don’t expect significant distressed sales in this downturn, I don’t think the decline in starts and new home sales will be anywhere near as persistent as during the housing bust.

The next graph shows housing starts under construction, Seasonally Adjusted (SA). This is a record number of housing units under construction.

Red is single family units. Currently there are 777 thousand single family units (red) under construction (SA). This is below the previous seven months, and 51 thousand below the recent peak in April and May. Single family units under construction have peaked since single family starts are now declining. The reason there are so many homes under construction is probably due to supply constraints.

Blue is for 2+ units. Currently there are 932 thousand multi-family units under construction. This is the highest level since December 1973! For multi-family, construction delays are probably also a factor. The completion of these units should help with rent pressure.

Combined, there are 1.709 million units under construction.

Conclusion

The outlook for 2023 depends on several factors: the Fed, mortgage rates, whether or not there is a recession in 2023, and inventory levels (both existing and new home inventory). My sense is this downturn will be more like each of the downturns in the 1980 period, as opposed to the six years of declining new home sales during the housing bust (there were two recessions in the 1980 period so new home sales did decline for several years). So, my guess is that new home sales will bottom for this cycle in 2023, down another 15% to 20% from 2022 levels.

My guess is multi-family starts will decline in 2023 as rents soften and as the record number of housing units under construction are completed. Total starts will likely be down around 15% to 20% year-over-year in 2023, depending on how quickly multifamily starts slow down.

Ten Economic Questions for 2023

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