The numbers: U.S. home builders started construction on homes at a seasonally-adjusted annual rate of 1.42 million in February, representing a 10.3% decrease from the previous month’s revised figure, the U.S. Census Bureau reported Wednesday. Compared with February 2020, housing starts were down 9.3%.
The pace of permitting for new housing units also slowed in February. Permitting for new homes occurred at a seasonally-adjusted annual rate of 1.68 million, down 10.8% from January but up 17% from a year ago.
Economists polled by MarketWatch had expected housing starts to occur at a pace of 1.54 million and building permits to come in at a pace of 1.75 million.
What happened: A slowdown in both the construction of single-family homes and multifamily buildings prompted the decline in housing starts in February. Single-family starts were down 8.5% nationwide, while multifamily starts fell 14.5%.
Regionally, the West was the only part of the country where housing starts were up on a monthly basis in February, with a 17.6% increase. The Northeast saw the biggest drop in starts, with nearly a 40% decline, followed by the Midwest (down 35%) and South (down 10%).
On the permitting side of the equation, there was a downturn in permits for both single-family and multifamily homes. The Midwest was the only region where permits rose between January and February, and the South saw the most pronounced slowdown in permits.
The big picture: February’s home construction data will likely prove to be an aberration in hindsight. Last month’s record-breaking cold weather — including a winter storm that crippled much of the state of Texas — caused a serious slowdown in home-building activity.
But in the long-run the factors that had driven gain in home building during the latter half of 2020 remain in place for now. Mortgage rates are still historically low, and the COVID-19 pandemic has prompted many people to consider buying larger homes as remote working becomes a permanent arrangement for some.
But years of under-building following the Great Recession mean that the U.S. housing market now has a supply shortage, particularly on the existing-home front. Even first-time home buyers are now increasingly considering purchasing newly-built homes given the lack of other options.
“We’re just chronically under supplied after the global financial crisis,” said Sam Dunlap, chief investment officer at Angel Oak Capital Advisors, a Georgia-based investment management firm.
“The supply picture takes years to fix,” Dunlap added. “The one way we can solve this problem is to continue to build more single family units in the US to meet the ever increasing demand.”
This does not mean builders aren’t facing headwinds in their pursuit to construct more homes. Supply-side challenges are constraining builders’ capacity, said Odeta Kushi, deputy chief economist at title-insurance company First American. Among the headwinds Kushi cites are high lumber costs, a lack of affordable lots to build on and regulations that drive up the cost of construction.
What they’re saying: “The coldest February in more than three decades also put a freeze on home construction, as lower-than-average monthly precipitation concentrated during the middle of the period in a major, coast-to-coast, winter and ice storm,” Michael Gregory, deputy chief economist at BMO Capital Markets, said in a research note.
“Over the next couple weeks, though, other February data—including new and existing home sales, and durable goods orders—will also be heavily distorted by the storm,” Ian Sherpherson, chief economist at Pantheon Macroeconomics, said in a research note.
“With policy remaining very accommodative and consumers sitting on mountain of liquid savings — which will grow ever large from the upcoming round of fiscal transfers — we expect home buying and investment to continue making modest gains throughout 2021,” Mizuho Securities U.S. chief economist Steven Ricchiuto and U.S. economist Alex Pelle wrote in a research note.