William Blair mpany : Housing Starts

The 2.5% decrease in December's housing starts was worse than the anticipated 2.3% gain. Starts are now 6.4% higher than a year ago, compared with 17.1% higher in November and 0.7% lower in October. Given the volatility in this data from month to month, it is more useful to examine the smoothed three-month average change; using this measure, starts were 2.5% lower on the previous month in December after being 3.8% higher in November. The decrease in total starts was due to weakness in starts for both multifamily homes, which fell by 3.4% after a 9.9% increase, and single-family starts, which fell by 3.3% following an 11.0% fall. Multifamily starts are now 8.6% higher than a year ago, while single-family starts are 6.1% higher than last year. Starts in December were still solidly above the 1 million mark, at 1,149,000. Since 1947, the median monthly reading in housing starts has been 1.46 million. Meanwhile, building permits fell by 3.9%, to 1,232,000-14.4% higher than 12 months earlier; they had been expected to fall by 6.4% in the month.

Regionally, the pattern of housing starts activity again shows some incredibly marked divergences: starts jumped by 24.4% in the Northeast, though declined by 12.4% in the Midwest, 7.6% in the West, and 3.3% in the South.

According to the latest NAHB homebuilders' survey for January, building activity was unchanged in the month. The sentiment index remained at 60, after 62 in November (50 is the dividing line between viewing conditions as good or poor). The NAHB stated: 'After eight months hovering in the low 60s, builder sentiment is reflecting that many markets continue to show a gradual improvement, which should bode well for future home sales in the year ahead.' 'January's HMI reading is right in line with our forecast of modest growth for housing,' said NAHB Chief Economist David Crowe. 'The economic outlook remains promising, as consumers regain confidence and home values increase, which will help the housing market move forward.'

The weakness in this report was a little surprising given the 2.2% increase in construction hours worked in the month, in addition to the unseasonably warm weather. We suspect this is just normal volatility, and mortgage applications have held up extremely well. While the financial markets are certainly not telling you this, the reality is that the economic fundamentals that typically underpin housing in the U.S. still look quite solid, this includes, rising house prices, rising incomes, and rising employment. Consumer confidence also remains at a high level and housing affordability is relatively good. The result is a housing market that is still trending upward, but at a slower (and hopefully more sustainable) pace than was the case in the lead-up to the last crisis.

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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.