Despite a drop in housing starts in January, the housing sector remains strong and new home constructions should pick up in the months ahead.
Housing starts fell 3.8 percent in January to a seasonally adjusted annual rate of 1.1 million, the Department of Commerce reported on Wednesday. This came as a surprise to economists, many of whom predicted an increase for the month of January. Builders appeared to have reacted to market uncertainty, concerned that buyers are thinking twice about purchasing new homes after a drop in stock and commodity prices.
“The dominant new home buyer right now is someone that owns a home, and has a fair amount of equity and good credit,” said David Crowe, chief economist at the National Association of Home Builders. “They are the ones that likely saw a hit in their wealth number with the market uncertainty, so it stands to reason that builders would react to that and say ‘I’ll just hold off a bit.’”
Regionally, new home constructions fell most sharply in the midwest, at almost 13 percent. The west saw almost no change, while the northeast and south experienced modest drops between three and four percent.
In another sign of weakness, the National Association of Homebuilders/Wells Fargo Housing Market Index report released on Tuesday suggests builder confidence in the single family home market dropped slightly. Despite this, declining unemployment, low mortgage rates, and pent-up demand are strong signs new home constructions will increase. Pent-up demand is the result of low turnover over the past five years, as owners avoided selling their homes until prices rose.
While modest growth is possible this year, a major increase in housing starts may take longer because of a bigger slowdown in U.S. economic activity, said Millan Mulraine, deputy chief U.S. economist at TD Securities.
Some economists note that the drop in housing starts could be the result of more seasonal weather patterns returning after a warm fall.
“It looks like starts were accelerated in October and November,” said Sam Coffin, economist at UBS.
As the weather cooled in January, new home constructions dropped, he said.
One positive sign from the January report is that the number of building permits remained largely unchanged since December at 1.2 million.
A few parts of the housing sector continue to grow, including smaller-scale building companies and some regional builders.
For Greenbuilders, a Baltimore-based custom builder that specializes in environmentally sustainable construction, longer-term trends are more important than month-to-month housing starts numbers. An economic recovery over the past two years has spurred interest in green construction.
“So far, this year has been excellent,” said Polly Bart, president of Greenbuilders. “There’s been a long, slow economic recovery and there’s no question just from observations that things have gradually gotten better.”
Regional homebuilders are also doing well. DSLD Homes, founded in 2008, is a single-family homebuilder with markets in Louisiana, Mississippi, and Alabama. In last year’s Housing Giants Survey from probuilder.com, DSLD ranked among the top 50 builders in the country, with revenue over $350 million.
DSLD sees a good year ahead.
“We haven’t seen any drop year over year to this point,” said Toby Easterly of DSLD Homes. “We’re selling as many as we build.”