Housing starts in the U.S. slumped in January by the most in almost three years as unusually harsh winter weather added to the industry’s burdens.
Builders began work on 880,000 homes at an annualized rate last month, matching the lowest projection in a Bloomberg survey of economists and down 16 percent from December, according to data from the Commerce Department issued today in Washington. The decrease was the biggest since February 2011. Another report showed wholesale prices remained constrained.
The coldest January in two decades probably limited groundbreaking as construction in the Midwest dropped to a record low, indicating homebuilding will contribute less to economic growth at the start of 2014. The outlook for the rest of the year will hinge on whether hiring picks up enough to overcome declining affordability as mortgage rates and property values climb.
“We won’t know until probably April at the earliest whether there is some change in the fundamentals” of the market because of the weather impact, said Richard Moody, chief economist at Regions Financial Corp. in Birmingham, Alabama, whose projection of 894,000 starts was among the closest in the Bloomberg survey. If there is growth in job creation and incomes, “that will offset higher mortgage rates,” he said.
The continued bad weather this month means “we won’t know until probably April at the earliest whether there is some change in the fundamentals,” Moody said.
The jobs outlook will also play a role elsewhere. A report today showed U.K. unemployment unexpectedly rose in the fourth quarter, reinforcing the case for the Bank of England to keep its key interest rate at a record low.
For their part, Federal Reserve policy makers plan to soon change their guidance for the path of interest rates as unemployment declines toward a threshold for considering an increase in borrowing costs, minutes of their January meeting showed today.
“Several” Fed policy makers also said that in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace” of the Fed’s bond purchases $10 billion at each meeting.
Stocks fell as the Fed minutes indicated stimulus cuts will continue and as the International Monetary Fund said risks of prolonged market turmoil in emerging markets and deflation in the euro area are threatening the world’s economic prospects. The Standard & Poor’s 500 Index dropped 0.7 percent to 1,828.75 at the close in New York.
The median estimate of 84 economists surveyed by Bloomberg projected January housing starts in the U.S. would come in at a 950,000 pace. Estimates ranged from 880,000 to 1.04 million. The Commerce Department revised the December reading up to 1.05 million from a previously estimated 999,000 pace.
Another report today showed the producer-price index increased 0.2 percent in January, led by gains in goods such as food and pharmaceuticals. The advance followed a 0.1 percent rise the prior month, according to data from the Labor Department. Over the past 12 months, wholesale prices rose 1.2 percent.
The data marked the debut of the first major overhaul of the PPI since 1978, which more than doubled its reach of the economy by including prices received for goods, services, government purchases, exports, and construction. The lack of pressure at the earlier stages of production, one reason inflation is running below the Federal Reserve’s target, has given policy makers room to keep borrowing costs low.
“Pipeline pressures remain muted,” said Russell Price, a Detroit-based senior economist at Ameriprise Financial Inc., who correctly projected the 0.2 percent gain in the PPI. “Overall, businesses have very weak pricing power.”
The Commerce Department’s housing report showed permits for future projects declined 5.4 percent to a 937,000 pace in January, less than the projected 975,000, according to the Bloomberg survey median.
The smaller decrease in applications shows the weather played a role in last month’s slump in starts, according to economists such as Joshua Shapiro.
“Normally when permits hold up in the face of a steep drop in starts, the starts have merely been delayed owing to weather conditions, and they will occur when conditions allow,” Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York-based forecasting firm, said in a research note.
For all of 2013, builders began work on 926,700 homes, the most since 2007’s 1.36 million.
Work on single-family houses dropped 15.9 percent to a 573,000 rate in January, the fewest since August 2012, from 681,000 the prior month. Construction of multifamily projects such as condominiums and apartment buildings declined 16.3 percent to an annual rate of 307,000, a three-month low.
Three of four regions showed declines in groundbreaking last month, led by a record 67.7 percent plunge in the Midwest to a 50,000 annualized pace, the fewest in data going back to 1959. Starts dropped 12.5 percent in the South.
By contrast, in the Northeast, where the mercury also declined, starts surged 61.9 percent, the most since December 2012.
Weather probably played less of a role in the West, where starts dropped 17.4 percent last month, the biggest decrease since November 2012. Last month was the third-driest January on record in California, according to the National Oceanic and Atmospheric Administration. California, Arizona and Nevada all had January temperatures ranking among the 10 warmest on record, NOAA said.
The drop in the West, following a 25.9 percent surge in December, still put starts in the region at their second-strongest level in almost six years.
Inclement weather has weighed on the economy so far this year, holding back builders and preventing customers from visiting car dealerships and retailers. Government offices in Washington closed Feb. 13 as a winter storm that paralyzed the South with snow and ice moved to the Northeast, canceling flights, snarling traffic and downing power lines.
Last month was the coldest January since 1994 in the contiguous U.S., based on gas-weighted heating-degree days, a measure of energy demand, according to Commodity Weather Group LLC in Bethesda, Maryland. The Northeast is also on track for the coldest winter since 1982, measured from December to February, the group said.
Confidence among U.S. homebuilders plunged in February by the most on record as the bad weather limited prospective buyer traffic and depressed sales.
The National Association of Home Builders/Wells Fargo sentiment gauge slumped to 46 this month, weaker than the most pessimistic estimate in a Bloomberg survey, from 56 in January, figures from the Washington-based group showed yesterday. All four regions showed declines. Readings less than 50 mean more respondents reported poor market conditions than good.
Beyond weather, borrowing costs for homebuyers have climbed since mid-2013. The 30-year fixed mortgage rate averaged 4.28 percent in the week ended Feb. 13, up from 3.35 percent in early May last year, according to data from Freddie Mac in McLean, Virginia.
At the same time, some builders, such as Atlanta-based Beazer Homes USA Inc., remain upbeat about the outlook for demand.
“While housing isn’t the screaming bargain that it was a year ago, it is still highly affordable in relation to household incomes and to alternative rental payment,” Chief Executive Officer Allan Merrill said on a Jan. 31 earnings call. “Household formations are occurring, and they drive new construction.”