The latest housing market analysis from the National Association of Home Builders (NAHB) reveals diverging trends as the Federal Reserve evaluates inflation and labor market data. Single-family construction is experiencing a rebound after cycle lows, while multifamily development shows signs of slowing down after a surprisingly strong run.

 
According to the market update from Robert Dietz, NAHB Chief Economist, interest rates experienced sharp fluctuations at the beginning of July, prompting speculations about the Federal Reserve's future actions. During the last week of June until early July, the 10-year Treasury rate surged from 3.7% to nearly 4.1%, pushing the average 30-year fixed-rate mortgage to almost 7%. The Federal Reserve's comments indicated multiple additional federal funds rate hikes in the coming months, contributing to the higher rates.
However, the report suggests that crucial data affecting the housing market is inflation. The June Consumer Price Index data brought positive news, with consumer inflation declining to a 3% year-over-year growth rate. Moreover, internal indicators suggest further declines as the Federal Reserve aims to bring inflation closer to 2%. Notably, shelter inflation, encompassing rent and homeowners' imputed rent, accounted for a significant 70% of the inflation gain in June.
As above-average levels of apartments under construction are completed, shelter inflation growth is expected to slow down in the coming months. Additionally, the Producer Price Index business inflation measure for May indicates only a 1.1% year-over-year gain, with residential construction material pricing up by only 0.5% on a year-to-date basis in 2023.
Additionally, the NAHB/Wells Fargo Housing Market Index (HMI) reflects growing yet cautious optimism among builders. The HMI surged to a reading of 56 in July, its highest since June 2022, driven by strong demand for new homes due to low existing inventory. However, the industry is still grappling with challenges like rising mortgage rates, elevated construction costs, and limited lot availability.
The single-family sector saw a positive development with permits increasing by 2.2% to an annual rate of 922,000, marking the best reading in a year. In contrast, single-family starts are down over 7% compared to the previous year. Multifamily development, on the other hand, witnessed a slowdown, with permits decreasing by 12.8% to an annualized pace of 518,000, the lowest since late 2020. Despite the slowdown, multifamily completions remain elevated, with over 994,000 apartments under construction, the highest number since 1973.
https://www.nahb.org/blog/2023/07/eoe-summary-housing-market-is-diverging