Homebuilding in the United States jumped higher in February, turning around after five consecutive months of falling.
Housing starts, a measure of new home construction, rose by 9.8% in February from January. But that’s still down 18.4% from a year ago, according to data released Thursday by the Census Bureau. Starts in January rose to a seasonally adjusted annual rate of 1.450 million, up from the revised January estimate of 1.321 million.
Housing starts had big drops in May and July last year, when spiking mortgage rates pushed many prospective home buyers to the sidelines. Starts bounced back slightly in August, but have been falling since then.
Single‐family housing starts in February were up 1.1% from the revised January figure, at a seasonally adjusted annual rate of 830,000.
As mortgage rates trended lower from November through January, builders have begun to feel more optimistic that conditions may improve in 2023. But recent strong economic data and uncertainty in the banking sector mean that inflation concerns remain, along with volatile mortgage rates.
Building permits, which track the number of new housing units granted permits, jumped up in February for the second month in a row, rising 13.8% from the revised January rate, and were down 17.9% from a year ago. In February building permits were at a seasonally adjusted annual rate of 1.524 million.
New homes providing needed inventory
“Moving into the spring home selling season, builders showed signs of optimism in anticipation of more buyer demand,” said Kelly Mangold of RCLCO Real Estate Consulting. “However, interest rates and development costs remain high, while prices are softening — which is impacting the potential upside on home sales.”
And mortgage rates remain volatile for buyers. Rates climbed half a percentage point throughout February, but are now cooling again as uncertainty in the banking industry has sent investors to the relative safety of bonds.
Historically low inventory of existing homes — many owned by homeowners reluctant to sell and part with an ultra-low mortgage rate — is pushing many buyers toward new construction housing.
“The number of existing homes on the market has reached record low levels which is giving new homes less competition — and they are often one of the only options for motivated buyers,” Mangold said.
According to a recent analysis of the housing market, the United States was short about 6.5 million homes between 2012 and 2022. New construction of all kinds is critical to closing that gap.
“We are currently in a period of economic uncertainty, and it is possible that we could see improvements as the year progresses, or that starts could experience a continued decline if we enter a true recession,” said Mangold.
Sentiment for homebuilders rises for third month
Homebuilder sentiment unexpectedly improved for a third month in March, reflecting a pickup in both sales and prospective buyer traffic.
The National Association of Home Builders/Wells Fargo gauge rose 2 points this month to a six-month high of 44, figures showed Wednesday. Among regions, only the South improved. The median estimate in a Bloomberg survey of economists called for a decline to 40.
Measures of current sales and prospective buyer traffic advanced to six-month highs, underscoring pent-up demand despite an increase in borrowing costs over the past year. Even with the recent improvement in sentiment, the gauge is well below levels seen at the end of 2021 or before the pandemic.
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The Federal Reserve’s aggressive actions to tame inflation have hit the housing market particularly hard. High mortgage rates stifled demand, and new home construction has fallen steeply. Many construction firms still complain of challenges finding skilled labor, and the cost of both labor as well as materials remains elevated.
Looking ahead, the fallout from the failure of Silicon Valley Bank and related financial turmoil has driven down yields, which could push down mortgage rates and ultimately support demand. Even so, a recovery in the housing sector will likely come in fits and starts.
“While financial system stress has recently reduced long-term interest rates, which will help housing demand in the coming weeks, the cost and availability of housing inventory remains a critical constraint for prospective home buyers,” Robert Dietz, NAHB chief economist, said in a statement.
The NAHB report showed sales expectations for the next six months eased.
February data for housing starts and building permits will be released Thursday.
Bloomberg contributed to this report.