Construction of New U.S. Homes Plummets 14.8% in January as Builders Scale Back

Wintry Weather and Slowdown in Activity Contribute to Significant Drop

Construction of new homes in the United States experienced a sharp decline in January, falling 14.8% as home builders scaled back on new projects. This slowdown in construction activity can be attributed to the wintry weather conditions that prevailed throughout the country during the month.

Lowest Level since August 2023

According to the latest data, housing starts dropped to a 1.33 million annual pace in January, down from 1.56 million in December. This represents the lowest level recorded since August 2023. The decline witnessed last month is the most significant drop since April 2020, when the pandemic caused a nearly 27% decrease in starts. Excluding this pandemic-related drop, housing starts in January fell by the highest margin since 2015. The figures fell short of expectations on Wall Street, where a rate of 1.45 million was projected. It is important to note that the numbers have been seasonally adjusted.

Single-Family and Multi-Family Construction Impacted

Both single-family and multi-family construction experienced declines in January. Multi-family construction took a particularly hard hit, registering a nearly 36% drop. Despite these setbacks, builders maintain an optimistic outlook for future sales of new homes and anticipate strong demand, with expectations of interest rates decreasing throughout the rest of the year.

Building Permits Decrease, Indicating Future Construction Slowdown

Building permits, which serve as an indicator of future construction activity, declined by 1.5% to a rate of 1.47 million. The decrease in permits was driven by a 4.7% drop in the construction of new single-family homes and a significant 35.8% decrease in apartment construction. The Northeast region was the only area where builders increased construction, with single-family starts rising by 26.7%. Every other region experienced a drop in January. While permits for single-family homes saw a 1.6% increase, permits for apartments fell by 9%.

Optimism Amidst Slowdown

Although housing starts data is prone to volatility, the recent numbers indicate a slowdown in the construction of new homes in January. However, most builders remain optimistic about the future, as they anticipate falling mortgage rates to stimulate home-buying demand. Additionally, builders continue to benefit from the persistent shortage of previously owned homes. Historically, new homes accounted for only a tenth of overall sales, but according to the National Association of Home Builders, this share has now jumped to 30%.

Expert Insights

Commenting on the decline in housing starts, Thomas Ryan, a property economist at Capital Economics, highlighted the notable drop in multi-family starts and predicted that this sector will continue to hinder new developments throughout the year, considering the substantial number of multi-family units already under construction.

Ali Jaffery at CIBC Economics noted that the sharp pullback in starts in January could be a result of adverse weather conditions. However, Jaffery also emphasized that housing activity is anticipated to remain weak until the Federal Reserve provides clearer indications of its intent to ease policy.

Overall, the construction of new homes in the U.S. faced significant challenges in January, primarily due to wintry weather conditions and a slowdown in activity. While builders remain positive about the future and expect demand to strengthen, the sector will need to navigate through various obstacles, including weather disruptions and lending rates, that may affect construction activity throughout the year.

Analyst comment

This news can be evaluated as negative. The construction of new U.S. homes fell significantly in January, with the sharpest decline since the pandemic in April 2020. Building permits also decreased, indicating a slowdown in future construction. However, builders remain optimistic about future sales and demand, expecting interest rates to fall. The market is likely to experience a temporary slowdown in construction due to bad weather and potential impact from rising mortgage rates, but the persistent shortage of previously owned homes could continue to benefit builders.