Bad Weather Wallops Housing Starts, Rebound Expected

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Apartment Construction Ahead Of U.S. Housing Starts Figures
Luke Sharrett/Bloomberg via Getty Images
By Lucia Mutikani

WASHINGTON -- U.S. housing starts plunged to their lowest level in a year in February likely as harsh weather kept building crews at home, in the latest indication that the economy hit a soft patch in the first quarter.

Groundbreaking tumbled 17 percent to a seasonally adjusted annual pace of 897,000 units, the lowest level since January 2014, the Commerce Department said Tuesday.

January's starts were revised up to a 1.08 million-unit pace from the previously reported 1.07 million-unit rate. February's decline was likely a temporary setback for housing as permits for future construction rose 3 percent last month.

%VIRTUAL-pullquote-A weak first quarter is now a virtual guarantee as yet another cold winter is dampening activity.%Permits have been above a 1 million-unit pace since July.

"A weak first quarter is now a virtual guarantee as yet another cold winter is dampening activity," said Dan Greenhaus, chief strategist at BTIG in New York.

Bad weather, a strong dollar, weaker overseas growth and a now-settled labor dispute at the West Coast ports have put a damper on economic activity in recent months, casting doubts on an anticipated June interest rate hike from the Federal Reserve.

Still, Fed officials, who were due to start a two-day policy meeting Tuesday, are expected to drop the phrase "patient" from their so-called forward guidance on interest rates.

Last week, economists cut their first-quarter GDP growth estimates to as low as a 1.2 percent annualized pace in the wake of a weak February retail sales report. The economy grew at a 2.2 percent rate in the fourth quarter.

U.S. Treasury debt prices extended gains on the housing starts data, while the dollar trimmed losses against the euro and the yen.

Gripped by Snow, Cold

February's decline pulled starts below the one million-unit threshold for the first time since last August. Economists had forecast groundbreaking at a 1.05 million-unit pace in February.

Snowy and cold weather conditions gripped much of the country in the second half of February. Housing starts were down 3.3 percent compared to February last year.

"We saw broad-based weakness across the country with the biggest declines in the Northeast and Midwest, suggesting that harsh winter weather in these regions slowed new residential construction significantly," said Derek Lindsey, an analyst at BNP Paribas in New York.

"Despite the disappointing print in starts, building permits rose and remain on an upward trend, suggesting this soft patch in construction is likely to be temporary."

Groundbreaking plunged 56.5 percent in the Northeast to the lowest level since January 2009. Starts in the Midwest dropped 37 percent to a year low.

In the West, groundbreaking activity fell 18.2 percent. Starts in the South, where most of the home building takes place, slipped 2.5 percent.

Short-Lived Setback

But the step back in housing starts is likely to be short-lived. A rapidly tightening labor market is expected to push up wage growth and encourage more young adults to move out of their parents' basements and set up their own homes.

Already in the fourth quarter, household formation was accelerating, breaking above the one-million mark that usually is associated with a fairly healthy housing market.

While much of the gain in households will go into rentals, that will still be a boost to housing starts this year.

Last month, single-family homes groundbreaking, the largest part of the market, declined 14.9 percent to its lowest level since last June.

Groundbreaking for the multifamily homes segment dived 20.8 percent. Improving household formation and the lowest rental vacancies in more than two decades should boost multifamily starts this year.

Single-family permits fell 6.2 percent last month to a nine-month low. Multifamily permits surged 18.3 percent.

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Bad Weather Wallops Housing Starts, Rebound Expected
In 2013, the median lot size of a new sold single-family house was 8,596 square feet, or just under 0.2 acres. While that might not seem like a lot for you suburban homeowners, a regional breakdown shows that the small average size isn't due to urban inhabitants alone. The Northeast enjoys the largest average lot, at 13,052 square feet, while the less densely populated South and West lay claim to just 8,649 square feet and 6,796 square feet, respectively.
From a footprint of 1,650 square feet in 1978, the average American home has grown 50 percent, to 2,478 square feet. Yet tough times seem to be squeezing our expansionary attitude. Although new single-family homes sold in 2013 clocked in at a median 2,478 square feet, single-family homes completed in 2013 amounted to just 2,384 square feet. Homebuilder confidence has plummeted into pessimism in the last few months, hinting that the housing market's road to recovery might be rougher than expected.

While birth rates have held relatively steady for the past 40 years, everyone apparently needs more elbow room. The share of homes with four or more bedrooms has jumped from 27 percent in 1978 to 51 percent in 2013. And where would a bedroom be without a bathroom? While just 8 percent of 1978 homes had three or more baths, 37 percent of homes now fall in that category.

From 2008 to 2013, both the share of homes with four or more bedrooms and the share of homes with three or more bathrooms have jumped 10 percentage points, while median square footage is up 10.9 percent for the same period.

If there's one strong sign of new housing demand, it's home prices. After nose-diving during the Great Recession to a median sales price of just $216,700, home prices have been roaring back up. In 2013, the median sales price for a new single-family home was $268,900. But for those on the housing hunt, don't be discouraged. Home prices today still don't hold a candle to costs in 2006, according to the well-regarded Case-Shiller Home Price Index. In 2006, the index topped 200 before plummeting to less than 140, and current rates put the index just above 170.
It is America, after all. Our industrialized nation was built on the back of Henry Ford, and America is in no danger of breaking its automobile addiction. In 2013, a whopping 300,000 of the 429,000 new single-family homes sold included a two-car garage. And 98,000 new homes included a three-car garage -- the highest amount since 2007. Of all new homes built, only 10,000 failed to include a garage or carport.
American homebuyers are building bigger homes than ever before. But if there's one thing the recent recession has shown us, bigger isn't always better. Although 30 percent of Americans believe real estate is the best long-term investment, homeownership isn't for everyone. There are plenty of reasons to spend less or invest elsewhere -- and leave keeping up with the Joneses to Mr. and Mrs. Smith.
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