January U.S. housing starts came in well above expectations as they rebounded 18.6% from December’s 14.0% plunge, rising to a 1.23 million-unit seasonally adjusted annual pace.
Monthly housing-production estimates by the Department of Commerce during the winter months are difficult to interpret given the low levels of activity relative to the spring and summer, which often exaggerate monthly readings after seasonal adjustment.
Residential building permits rose 1.4% to a 1.35 million-unit annual pace. Despite a softening trend, permits are running roughly 15.0% ahead of starts, which suggests starts could rebound further in coming months.
Much of the monthly gain in starts is owed to a 25.1% leap in the single-family segment, which rose to a 926,000 unit pace. January’s increase breaks a four-month string of monthly declines.
One soft spot in today’s report is that single-family building permits fell 2.1% to an 812,000-unit pace, its slowest since August 2017.
Multifamily starts, which are normally quite volatile, increased 2.4% during the month after plunging 25.4% in December. Multifamily permits rose 7.2% to a 533,000-unit pace and continue to exceed expectations and track even higher.
Starts improved in every region with the exception of the Midwest, which fell 5.7% during January. The Northeast posted a huge 58.5% increase. The region, however, is by far the smallest for homebuilding and extremely volatile on a monthly basis.
The South saw starts rise 13.8%. The West, which has seen a modest pull back in residential construction due to slowing sales and continued affordability challenges, rose 29.3%.
Builders may also be seeing some relief from the rapidly rising material costs that were a hallmark of 2018, mostly tied to the tariff-related surge in lumber prices. For perspective, the average cost to frame a house in 2017 was 15% of the total estimated sales price and the largest share of construction costs.
January’s Producer Price Index (PPI) indicates the price of softwood lumber was down 10.0% year-over-year. Lower oil prices should also lead to further easing in asphalt material products, while gypsum wallboard and copper prices have also pulled back. “Material prices tend to be seasonal,” according to Wells Fargo Economics’ analysis of the January housing data, “And we expect a more modest rise in material costs as demand heats up in the spring.”
Wells Fargo suggests the housing market could overcome headwinds to produce a modest spring rebound.
“Amid softer sales and rising inventories, home prices continue to moderate, which should provide some relief for buyers challenged by affordability. Since Fed officials struck a more dovish tone and indicated they would likely put further interest rate hikes on hold, mortgage rates have retreated by roughly half a percentage point.
“Furthermore, builder confidence and mortgage application data have firmed since the start of the year, an indication sales and new home construction are set to improve in coming months.”