U.S. housing starts weakened in February, as homebuilders broke ground on 1,236k new homes. Consensus expected a more limited decline to 1,290k from the 1,329k (revised) recorded in January. Permits also disappointed, coming in at 1,298k, contracting 6% on the month.
Despite the unfavorable headline print, single-family homebuilding gained ground (+25k) to 902k, while the volatile multi-family segment accounted for the decline (-118k to 334k). Some pullback was expected in the multi-family segment due to the previous month’s outsized gain, while single-family starts gained momentum from the previous month’s +30k increase.
Building permits fell by 79k to 1,298k, after reaching a post-recession high in January. Both the single-family (-5k to 872k) and multi-family (-74k to 426k) segments saw permits fall. However, the single-family segment benefitted from a period of strength following hurricanes at the end of last year and remain elevated. The South (-87k) and the West (-13k) were the two regions accounting for the decline, after each hit a post-recession high in January.
All regions except for the Midwest (+11k) saw activity fall in February. Starts in both the South and the West fell by 50k, while the Northeast saw a 4k drop. That being said, starts in the South and West likely remain on an upward trajectory, in contrast to the Northeast and the Midwest.
Key Implications
After the previous month’s strong print which led starts to reach a post-recession high, a slowdown was anticipated in February. That being said, single-family starts posted another gain and permits remain elevated relative to 2017, indicating that activity should continue at a brisk pace this year.
Barriers to activity remain, however, including a continued labor shortage in the construction industry and a lack of buildable lots. Additionally, tax reforms that cap the state and local tax deduction and lower the mortgage interest deduction will work to shift demand to lower priced segments of the market. That won’t alter the number of housing starts, however, the value per unit under construction is expected to decrease as a result. While this uncertainty may have dampened builder optimism a hair in March, the NAHB builder’s index remains within reach of the near two-decade high achieved at the end of last year.
Positive fundamentals including a tightening labor market and accelerating wages should support demand over 2018, offsetting the burden of higher mortgage rates. At the same time, tight inventories and rising prices will continue to support homebuilding, with an improvement in the homeownership rate supporting activity in the single-family segment in particular. As such, we expect residential investment to edge higher this year, bolstered by strength in the single-family segment.
