Question #8 for 2025: How much will Residential investment change in 2025? How about housing starts and new home sales in 2025?
Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2025. Some of these questions concern real estate (inventory, house prices, housing starts, new home sales), and I’ll post thoughts on those in this newsletter (others like GDP and employment will be on my blog).
I'm adding some thoughts and predictions for each question.
Here is a review of the Ten Economic Questions for 2024.
8) Residential Investment: Residential investment (RI) was slightly positive through the first three quarters of 2024. Through November, starts were down 4.3% year-to-date compared to the same period in 2023 (due to a sharp decline in multi-family starts). New home sales were up 2.1% year-to-date through October. 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 2025? How about housing starts and new home sales in 2025?
First a graph of RI as a percent of Gross Domestic Product (GDP) through Q3 2024:
We don't have the data yet for Q4 2024 yet, but real RI will likely be up slightly in 2024 compared to 2023, following two consecutive years with declining RI.
The second graph shows single-family and multi-family housing starts through November 2024. Year-to-date (YTD), total starts are down 4.3% compared to the same period in 2023 and will likely finish the year around 1.36 million total starts (down from 1.42 million in 2023). Note that the weakness in 2022 and in early 2023 was in single family starts (red) but shifted to multi-family (blue) in the 2nd half of 2023 and in 2024. Single family starts are up 7.2% YTD, and multi-family down 30.1% YTD.
The third graph shows New Home Sales since 1963 through November 2024. The dashed line is the November sales rate. Year-to-date, new home sales are up 2.4% compared to the same period in 2023 and will likely finish the year around 684 thousand (up 2.7% from 666 thousand in 2023).
Here is a table showing single and multi-family housing starts and new home sales since 2000. Note that single family starts, and new home sales declined sharply for several years following the housing bubble. The dynamics in this cycle are very different, and there will not be significant distressed sales in this cycle. Also new home sales were not as elevated prior to the downturn, so the decline wasn’t as sharp.
The decline in single-family starts and new home sales was not as severe or persistent as during the housing bust. Multi-family starts have been down significantly for two straight years.
The next graph shows housing starts under construction, Seasonally Adjusted (SA). There are still a large number of multi-family housing units under construction.
Currently there are 637 thousand single family units (red) under construction (SA). This is 193 thousand units below the pandemic peak in May 2022. Single family units under construction peaked almost three years ago once the supply chain constraints eased.
Currently there are 797 thousand multi-family units (blue) under construction. This is 224 thousand below the record set in July 2023 of 1,021 thousand.
Combined, there are 1.434 million units under construction, 277 thousand below the all-time record of 1.711 million set in October 2022 and the fewest since August 2021.
In the three years prior to the pandemic, there were about 1.1 to 1.2 million housing units under construction. So, this is still higher than normal.
Conclusion
The outlook for 2025 depends on mortgage rates and inventory levels (both existing and new home inventory).
My guess is multi-family starts will decline further in 2025, likely down 5% or so year-over-year (less than the previous 2 years). Single family starts will likely be mostly unchanged year-over-year, putting total starts down slightly.
I expect New Home sales to be up around 5% YoY.
Here are the Ten Economic Questions for 2025 and a few predictions:
• Question #8 for 2025: How much will Residential investment change in 2025? How about housing starts and new home sales in 2025?
• Question #9 for 2025: What will happen with house prices in 2025?
• Question #10 for 2025: Will inventory increase further in 2025?