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Most American families want to own their own homes, but builders are betting that surging mortgage rates will push more people to rent.
The number of apartments, townhouses, condos and other multi-housing projects that builders are working on jumped in April to the highest level in 36 years.
Read: Builders slow work on new homes as rising mortgage rates temper demand
By contrast, the number of single-family homes that builders started in April fell to a six-month low.
Single-family homes once accounted for as much as 83% of all new housing built. Now it’s fallen to less than two-thirds.
The cross currents in the housing market right now could intensify those trends.
For one thing, buying a new home is more unaffordable now than perhaps anytime in U.S. history.
Housing prices have climbed to record highs, driven by strong demand and a lack of supply.
The cost of building a house has also soared because of material shortages and other problems tied to the pandemic. Labor is more costly and hard to find, too.
The latest blow for would-be buyers are rising mortgage rates as the Federal Reserve aims to choke off high inflation.
When the Fed raises interest rates, mortgage costs also go up. The average rate on a 30-year fixed mortgage has jumped to more than 5% from a modern-record low of 2.75% last fall. That triggered an 11% decline in mortgage applications last week.
The high cost of housing in turn is likely to force more people to rent. Renting isn’t cheap, however.
The cost of rent has also surged since the first stages of the pandemic in 2020. And that’s drawing more investors into the real-estate market to acquire housing units for rent as a means to profit.
Based on the consumer price index, rents have climbed 4.8% in the past year to mark the biggest increase since 1987. Research by private firms suggest rents are rising even faster, perhaps twice as fast as what government data show.
“Rental inflation is expected to remain high,” said U.S. economist Alex Pelle of Mizuho Securities.
In April, builders started construction on an annualized 624,000 multi-family dwellings. That’s how many units would be started in a year if firms worked at the same rate in every other month as they did in April.
It would also be the highest level since 1996.
Single-family homes were started last month at a 1.1 million annual rate, a 10% drop from a pandemic peak in November.
“Slower home construction is the last thing that a housing market starved for supply needs,” said senior economist Ben Ayers of Nationwide Insurance.
