Housing Starts in U.S. Unexpectedly Declined 2.5% in December

New-home construction in the U.S. unexpectedly fell in December, indicating the industry lost some momentum entering 2016.

Residential starts declined 2.5 percent to a 1.15 million annualized rate, from the prior month’s revised 1.18 million pace, a Commerce Department report showed Wednesday. The median forecast in a Bloomberg survey called for an increase to 1.2 million. Permits, a proxy for future construction, also fell on fewer applications for multifamily projects.

“Builders are extremely cautious to increase spending for fear of over-extending themselves in case there’s an economic downturn,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “We’ll see continued demand for new housing and prices will move higher, but builders aren’t accelerating new construction.”

Housing demand would benefit from faster wage growth and more broad-based access to credit, allowing more Americans to take advantage of low mortgage rates. The report showed a pickup last month in applications to build single-family homes, indicating construction will gradually advance in coming months.

For all of 2015, housing starts climbed 10.8 percent to 1.11 million, the strongest year for construction since 2007.

Estimates for December starts ranged from 1.11 million to 1.3 million. The previous month was revised from a 1.17 million pace.

Permits decreased 3.9 percent to a 1.23 million annualized rate last month, reflecting an 11.4 percent slump in applications for multifamily projects. Permits for one-family dwellings climbed an annualized 740,000 units, the highest level in eight years.

Builders last month faced bigger backlogs, with 150,000 homes authorized for construction and not yet started, the most since June. Some 981,000 houses were under construction in December, up 1.7 percent from a month earlier and the most since May 2008, the Commerce Department’s figures showed.

Beginning construction of single-family houses fell 3.3 percent to a 768,000 rate after surging 11 percent in November.

Work on multifamily homes, such as townhouses and apartment buildings, dropped 1 percent to an annual rate of 381,000. Data on these projects, which have led housing starts in recent years, can be volatile.

Three of four regions showed a decline in new home construction last month, led by a 12.4 percent slump in the Midwest and a 7.6 percent decline in the West.

Builder Sentiment

The National Association of Home Builders/Wells Fargo index of homebuilder sentiment held at 60 in January, in line with the average for all of 2015, figures showed on Tuesday. Readings greater than 50 mean more respondents reported market conditions as good. The measure of buyer traffic fell and the six-month outlook cooled.

The progress of the job market will help determine the strength in housing this year. A jump in December payrolls capped the best back-to-back years for employment since 1998-99, one reason residential real-estate sales and construction also improved last year.

Demand is also expected to advance in the longer term as more young adults who delayed home ownership -- in part due to the burden of student loans -- improve their finances and begin to purchase entry-level homes in a bigger way.

Borrowing costs are staying low even after the Federal Reserve began raising its benchmark interest rate for the first time since 2006. The central bank has said further moves will be gradual.

Residential investment contributed 0.27 percentage point to economic growth in the third quarter, when the economy grew at a 2 percent annualized rate.

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