U.S. homebuilding perked back up in January, after a December lull. Homebuilders broke ground on 1,326k new homes, slightly ahead of market expectations, with the figure coming atop an upward revision in December’s tally. Permits also posted a slightly better than expected result, rising 7.4% on the month.
Both single and multifamily starts posted gains. The more volatile multifamily segment saw building tick up by 24% to 449k, the highest level since December 2016. At the same time, homebuilding in the single family segment was up 3.7% to 877k, after a 10.6% drop in December.
Building permits rose a healthy 7.4% in January to 1,396k, reaching a new post-recession high. The jump was driven entirely by the multi-family segment (+26.5%). Single family permits were down slightly (-1.7%), after a period of strength in the last four months of 2017. Regionally, the strength in permits was concentrated in the South (+21.9%) and West (+5.3%), both regions attaining a post-recession high.
All regions except for the Midwest saw increased to start the year. Starts in the Northeast rose 45%, the West was up 10.7% and the South rose 9.4%. Starts in the Midwest were weak (-10.2%), and have been on a softening trend over the past year.
Key Implications
We had thought the December drop in starts was likely a blip, and that has proven to be the case. January’s housing starts tally is the highest level in more than a year. And indications are that there is still momentum building, as the number of housing starts authorized, but not yet started, reached a post-crisis high.
Still, there are a few clouds over the near-term housing outlook. The changes to the mortgage interest deduction and the state and local tax deduction as part of the Tax Cuts and Jobs Act in December will impact demand housing in higher-priced and higher-taxed regions. The additional uncertainty may have led to a slight pullback in builder confidence in January, which held during February. That uncertainty adds to the challenge of a shrinking pool of construction workers, and rising mortgage rates. All these factors are expected to put downward pressure on homebuilding.
Nonetheless, optimism in the housing market remains within reach of the 18-year high hit in December. And, positive fundamentals such as a healthy labor market and accelerating wages will support demand, while tight inventories and rising prices will incentivize new homebuilding. As such, we expect residential investment to edge higher this year, albeit only modestly, led by particular strength in the single family segment.
