Housing starts fell in January after a strong December.
Housing starts fell in January after a strong December.

U.S. homebuilders started construction on fewer projects in January than in December, continuing a six-year, saw-tooth pattern of ups and downs in housing starts.

January housing starts were at a seasonally adjusted annualized rate of 1.065 million units, 2 percent below the downwardly revised December estimate of 1.087 million. Economists surveyed by Bloomberg predicted that housing starts would slow down in January and posted a median forecast of 1.070 million units per year.

Inclement weather contributed to the drop in housing starts in the U.S. in January — especially in the Northeast and Midwest regions, which saw a 3.5 percent and 22.2 percent drop in housing starts respectively because of heavy snowfall and frigid temperatures. Although housing starts is a seasonally adjusted indicator, winter is historically the worst time of year for starting construction on new homes because cold weather dissuades potential buyers from leaving home to meet with builders and heavy snowfall prevents builders from breaking ground on new projects.

Compared to December, homebuilders met with fewer prospective homebuyers in January and felt slightly less confident about their sales prospects for the year, according to the National Association for Home Builders/Wells Fargo Housing Market Index. According to builders surveyed by the NAHB, buyer traffic, a measurement of consumer interest, fell five points to 39 in January and overall confidence for the 2015 housing market fell two points to 55. A rating of 50 or above is generally considered good and builders surveyed said that harsh weather conditions were the primary reason the drop in NAHB ratings.

“Consumer cash flow and balance sheets have definitely improved, but we’ve had a lot of cold weather,” said Stan Shipley, senior managing director at Evercore ISI. “There’s no reason consumers have to rush out right now and buy a home because mortgage rates are relatively low, so they’re not being priced out of buying a home yet.”

Shipley said that the housing market is still at least two years away from reaching an annualized rate of 1.5 million housing starts – a number that would meet demographic and regional demand for the construction of new homes in the U.S.

“We’re in the middle of the recovery,” Shipley said. “We’re not in the 8th or 9th inning of this expansion – we’re in the fourth, maybe fifth.”

After the housing bubble burst in 2008 and housing starts bottomed out in April 2009, the housing market has recovered in fits and starts. But the underlying trend during that time shows that housing starts are on a gradual, if uneven, upward trajectory – since January of last year, housing starts have increased 18.7 percent.

Ryan Sweet, senior economist at Moody’s Analytics, says the housing market, like the rest of the economy, is poised to begin accelerating rapidly. Sweet said that by springtime, the housing market will start to pick up steam and he forecasts a 40 percent increase in housing starts to 1.65 million by year’s end.

Sweet said that as job creation continues to surge, companies will compete for employees, which will remove slack from the economy and cause wages to increase dramatically by mid-year. At that point, the Federal Reserve will increase interest rates, which will cause prospective homebuyers on the fence about buying a new home to get into the action and use their accumulated wealth to break ground.

“And when they jump in,” Sweet said, “homebuilders will respond by building more single-family homes. When the housing market turns, it will likely turn quickly.”

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