Housing Starts Plunge by the Most in Four Years

Beginning home construction plunged in February by the most in four years on colder-than-usual temperatures and snowstorms in parts of the U.S., while an increase in building permits indicated the drop may prove temporary.

Housing starts slumped 17%, the most since February 2011, to an 897,000 annualized rate after January’s revised 1.08 million pace, the Commerce Department reported March 17 in Washington. The median estimate of 80 economists surveyed by Bloomberg News called for 1.04 million. Ground-breaking in the Northeast plummeted by the most on record.

An increase in permits for future projects signals a rebound in residential construction that contributed little to economic growth in 2014. While sales remain challenged by limited supply of cheaper homes and sluggish wage growth, stronger hiring and low borrowing costs have fueled gradual progress in the industry.

“Weather is playing a big role,” Anika Khan, a senior economist in Charlotte, North Carolina, at Wells Fargo Securities, a subsidiary of the biggest U.S. mortgage lender, said before the report. Steady job gains and faster household formation will be “the key to underlying strength in the housing market” this year, she said.

Estimates for starts in the Bloomberg survey ranged from annualized rates of 984,000 to 1.08 million after a previously reported January pace of 1.07 million.

Building permits climbed 3% to a 1.09 million annualized pace, the fastest since October, after a 1.06 million rate a month earlier. They were projected at 1.07 million, according to the Bloomberg survey median. The increase was led by a jump in applications for multifamily projects. Permits for single-family dwellings were the lowest since May.

Starts of single-family properties dropped 14.9% to a 593,000 rate in February. Construction of multifamily projects such as condominiums and apartment buildings decreased 20.8% to an annual rate of 304,000.

Construction slumped 56.5% in the Northeast and 37% in the Midwest, which was the most since January 2014. Starts also dropped in the South and West, indicating weather was only partially to blame.

The report corroborated data on March 16 that showed builder confidence unexpectedly fell in March to an eight-month low. Sentiment decreased in three of four regions, as sales dropped and the outlook for demand stalled, according to the National Association of Home Builders/Wells Fargo.

Last month, the eastern seaboard saw below-normal temperatures from Atlanta to New York and record snowfalls in New England. The National Oceanic and Atmospheric Administration’s data showed the snowiest month on record for Boston, while record-low temperatures for any February were reached in Chicago, Buffalo and Cleveland.

Cheap borrowing costs are keeping homes affordable for some Americans. The average 30-year, fixed-rate mortgage was 3.86% in the week ended March 12, according to data from Freddie Mac in McLean, Virginia. That’s below the average 4.26% rate since the expansion began in June 2009.

Greater employment opportunities are providing support for the housing industry as well. The economy added 295,000 workers last month, more than forecast, and the unemployment rate dropped to 5.5%, the lowest in almost seven years.

At the same time, weaker income expectations are weighing on consumer confidence, which declined in March to a four-month low. The University of Michigan said March 13 its preliminary consumer sentiment index fell to 91.2 this month from 95.4 in February.

Average hourly earnings rose a weaker-than-forecast 0.1% in February, according to the Labor Department on March 6. Earnings were up 2% over the past year, also less than projected and matching the increase on average since the expansion began in mid-2009.

Residential investment contributed 0.1 percentage point to gross domestic product in both the third and fourth quarters, according to the Commerce Department.

Job growth and low interest rates are keeping companies such as real estate service provider Denver-based RE/MAX Holdings Inc. upbeat about prospects for housing this year.

“We are looking for continued jobs growth, wage growth, new construction, increased affordability and responsible lending to all propel the housing industry in 2015,” Chief Executive Officer David Liniger said on a March 13 earnings call.