Construction of new homes declined more than expected in February, a result of a steep drop in multi-family construction.

February’s housing starts were down 7 percent from January, with a seasonally-adjusted annualized rate of 1.236 million new units. Those numbers were lower than expected, capping a week of lackluster indications on the state of the economy after underwhelming data on retail sales and inflation.

However, the report points to a strong spring for single-family homes, construction of which rose 2.9 percent from January. As a result, economists still feel housing will make a positive contribution to the economy over the coming year.

“We remain cautiously optimistic in single-family housing,” said Michael Moran, chief economist at Daiwa Capital Markets. “Housing will be in the plus column in terms of advancing and contributing to economic growth.”

Homebuilders appear to agree. Yesterday’s release of the NAHB/Wells Fargo Housing Market Index showed confidence remained high.

They’re banking on continuing demand for homes coming from people like Ryan Taylor.

A Petty Officer First Class on active duty with the Navy, Taylor, 31 will transfer from San Diego to Great Lakes Naval Station in northern Illinois next month. He and his wife, Jenni, decided to buy a house for themselves and their 4-month-old daughter, Beatrice.

Ryan began shopping online between and during cruises at sea on the USS Essex. Having grown up in Milwaukee, he focused his search around Kenosha, in southeastern Wisconsin.

During a weeklong leave, the Taylors flew to Wisconsin and found a seller’s market. After visiting seven houses on their first day, they felt prices were too high and supply too low to be picky.

They submitted an offer on a 3-bedroom ranch-style house. “It wasn’t my preference,” said Taylor, who had hoped for a bungalow.

When a rival offer spurred a quick bidding war, the Taylors upped their terms and were accepted.

The house will need repairs, but Ryan—trained as an electrician in the Navy—is confident he’s up to the task. “I had a father who taught me hands-on skills and I work in a trade,” he said. “It’s not going to take me that much to fix it.”

The hot housing market is the latest sign Kenosha has recovered from the recession, in which the area lost much of its historic manufacturing base. At its peak, unemployment hit 12 percent.

Those manufacturing jobs haven’t come back, but the unemployment rate is down to around 3 percent as the city has pivoted to e-commerce. Amazon opened a distribution center in 2015 and local packing supply company Uline Inc. has expanded operations in the area. Now, Taiwanese electronics giant Foxconn plans to open a massive factory in nearby Pleasant Prairie.

“Kenosha is booming,” said Jamie Warosh, broker-owner at Century 21 Innovations. A 28-year veteran of Kenosha’s real estate market, she has seen this kind of market before.

“This is really just déjà vu,” Warosh said. “It’s doing the same thing it started doing in the early days of the boom in the late 90s.”

The improving labor market in Kenosha and across the country is a double-edged sword for housing. More jobs mean more demand, but also more difficulties for builders in finding workers and paying competitive wages.

“Before, contractors were knocking down your door to get business. Now it’s the opposite,” said Warosh. “They have more work than they can handle.”

Builders struggle as well with the rising costs of lumber. Wildfires and import tariffs on Canadian softwood have increased lumber prices nearly 40 percent since the beginning of 2017.

“For homes built in the 2000s, one-third of the construction cost was lumber,” said Aaron Terrazas, senior economist at Zillow. “We estimate that rising lumber costs have pushed new construction costs up between $6,000 and $10,000 for a median new home.”

Economists don’t expect the multi-family sector to pick up the slack and expected a February decline even before the announcement of steel tariffs that will hurt the market.

“The multi-family sector did very well for most of the expansion but it has probably gone as high as it can expect to go,” said Daiwa Capital’s Moran.

In Kenosha, the Taylors are scheduled to close at the end of the month. Can other prospective homebuyers expect building to catch up to demand? Stan Shipley, senior managing director at Evercore ISI, thinks relief is on the way—just not anytime soon.

“By mid-2019, you’ll probably have housing starts meeting long-term demographic demand,” said Shipley. “That will be the first time in 12 years.”

 Photo: Wisconsin Department of Natural Resources, used with a Creative Commons license

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