U.S. single-family homebuilding fell sharply in January amid disruptions from snowstorms and freezing temperatures, with a rebound likely to be limited by higher costs from tariffs on imports and elevated mortgage rates.
The report from the Commerce Department on Wednesday mirrored similar weather distortions that impacted retail sales and job growth last month, and suggested that economic activity slowed early in the first quarter. Part of the decline in housing starts was normalization following outsized increases in November and December amid recovery from Hurricane Helene.
Though residential construction remains supported by a shortage of previously owned houses for sale, a protectionist trade policy being pursued by President Donald Trump's administration could make it challenging for builders to break ground on new housing projects.
"The outlook for more homebuilding is cloudy and gray as import tariffs are likely to push up building costs in the months to come, and homebuyers report the higher cost of borrowing is holding them back from being able to afford and purchase a new home," said Christopher Rupkey, chief economist at FWDBONDS.
Single-family housing starts, which account for the bulk of homebuilding, dropped 8.4% to a seasonally adjusted annual rate of 993,000 units last month, the Commerce Department's Census Bureau said. Data for December was revised higher to show homebuilding increasing to a rate of 1.084 million units from the previously reported pace of 1.050 million units.
Snowstorms and frigid temperatures slammed large parts of the country in January. The weather disruptions were evident in steep declines in housing starts in the Northeast, Midwest and the densely populated South. But homebuilding surged 24.9% in the West, despite wildfires in California.
Single-family starts declined 1.8% year-on-year. Despite a national housing shortage, higher borrowing costs and tariffs on raw materials, including lumber and appliances, are a constraint for builders. New home construction is heavily reliant on imported materials. Trump in his first weeks in office slapped an additional 10% tariff on imported goods from China.
A 25% levy on imports from Mexico and Canada was suspended until March. Trump this month raised tariffs on steel and aluminum imports to 25% and has tasked his economics team with formulating plans for reciprocal tariffs on every country that taxes U.S. imports.
Stocks on Wall Street fell. The dollar was steady against a basket of currencies. U.S. Treasury yields rose.
RISING LUMBER PRICES
Expectations of tariffs are already boosting lumber prices. A survey on Tuesday showed the National Association of Home Builders/Wells Fargo Housing Market Index tumbled to a five-month low in February, a drop that was blamed on tariffs.
The survey noted that "with 32% of appliances and 30% of softwood lumber coming from international trade, uncertainty over the scale and scope of tariffs has builders further concerned about costs."
More cost pressures are coming from high mortgage rates. The average rate on the popular 30-year fixed-rate mortgage is hovering just under 7%.
Mortgage rates have remained elevated despite the Federal Reserve cutting interest rates by 100 basis points since September before pausing in January while assessing the economic impact of the Trump administration's policies, including tax cuts and mass deportations, deemed inflationary by economists.
Mortgage rates track the yield on the 10-year Treasury note, which has risen on the economy's resilience and stubborn inflation. Most economists expect the U.S. central bank will only cut rates once this year, if at all.
Higher mortgage rates and house prices have led to a glut of new homes, with inventory at levels last seen in late 2007. The supply overhang is another obstacle for builders.
Mass deportations are a challenge for builders as most construction workers are immigrants.
"Anecdotally, we continue to hear reports that illegal workers are not showing up to work due to fear of being caught and deported by ICE (Immigration and Customs Enforcement)," said Richard de Chazal, macro analyst at William Blair.
Starts for the volatile multi-family housing segment, buildings with five units or more, dropped 11.0% to a pace of 355,000 units. The scope for a rebound is limited as demand for rentals stabilizes following a post-COVID-19 pandemic boom.
Overall housing starts plunged 9.8% to a rate of 1.366 million units. Economists polled by Reuters had forecast housing starts would fall to a rate of 1.390 million units.
Starts slipped 0.7% from a year ago. Residential spending, which includes homebuilding, rebounded in the fourth quarter after two straight quarterly declines.
Goldman Sachs trimmed its first-quarter gross domestic product growth estimate to a 1.9% annualized rate from a 2.0% pace. The economy grew at a 2.3% rate in the fourth quarter.
Permits for future construction of single-family housing were unchanged at a rate of 996,000 units in January.
Multi-family building permits decreased 1.4% to a rate of 427,000 units. Building permits as a whole edged up 0.1% to a rate of 1.483 million units. They declined 1.7% from a year ago.
The number of single-family houses approved for construction that were yet to be started rebounded 2.8% to 145,000 units. The completions rate for that housing segment surged 7.1% to 982,000. The inventory of single-family housing under construction fell 0.5% to a rate of 641,000 units.
"Builders continue to prioritize working through the still-sizable, but shrinking, backlog of projects rather than increasing the pace of starts," said Daniel Vielhaber, an economist at Nationwide. "This should lead to housing starts remaining somewhat tepid in the coming months."
Source: reuters.com
