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After a major comeback in January, homebuilding has taken yet another hit as February data shows an 8.7% decrease in housing starts. However, the outlook is not inherently bleak due to the continuing drop in mortgage interest rates.

Key Takeaways

• The rate of construction for US single family homes dropped to over a 1-year low.
• Mortgage rates continue to decline, throwing a lifeline to the sinking housing market.
• Housing starts decreased 8.7% to a seasonally adjusted annual rate of 1.162 million units vs 1.213 million expected in February according to the Commerce Department.

Overall, housing starts hit an 8-month low in February. While a slight drop was predicted, the figure of 1.162 million units was well below market expectations of 1.213 million. Bad weather may have been among the contributing factors to the sharp decline in homebuilding compared to the prior month. January and December figures were revised higher.

Single Family Homes

Single-family homebuilding plummeted 17% in February. Single-family homes account for the main share of the housing market, and the rate of 805,000 units was the lowest since May 2017. The 17% drop was the biggest decline since February 2015.

The drop was seen in all four US regions. Permits to build single-family homes remained flat and are now outpacing housing starts, indicating that the decline may not be sustainable.

Multi-family homes, a more volatile segment, also saw an extreme shift of 17.8%, this time in positive territory as the rate climbed to 357,000 units in February. Permits for multi-family homes dropped 4.3% to a pace of 475,000 units.

Feb ‘19 US total #housing #starts were 1,162K (annualized). https://t.co/a0moOWD1Vf #Census pic.twitter.com/94C8vuN19o

— U.S. Census Bureau (@uscensusbureau) March 26, 2019

Future Activity

Building permits, a strong indicator of future homebuilding activity, dropped 1.6% to rate of 1.296 million last month, the second monthly drop in a row. Permits are now at least outpacing starts which indicates that activity may pick up in the coming months.

Higher mortgage rates, land and labor shortages, and hiked up prices for materials such as lumber have all contributed to tight inventory and expensive housing. However, the drop in borrowing costs and the accompanying statements from the Fed regarding future interest rate policy have taken some pressure off the housing market as the global economic slowdown cautioned the central bank to ease off.

The 30-year fixed rate mortgage saw the lowest rate in over a year last week with a 4.28% average, down from 4.31% the week before. House price inflation is also beginning to slow according to recent data as sellers reduce prices to reflect the current state of the market, while wage increases begin to outpace gains in home prices.

Confidence among homebuilders was recorded as steady according to a March survey, with zoning restrictions and the labor shortage still high on the list of negative factors impacting progress in the market. Investment in homebuilding saw the weakest performance in 9 years last year with a 0.2% contraction, returning to recessionary levels.

Market Reaction

The price of gold has seen little reaction to the news, with ongoing losses despite the negative housing data. Spot gold last traded at $1,317.94/oz, down -0.30% with a high of $1,324.37/oz and a low of $1,312.86/oz.

The sell-off is likely due to profit taking after the market hit a four-week high on Monday, with cautious traders cashing out for short-term gains rather than attempting to ride the price action any higher.

Gold futures for June are down -0.54% and trading at $1,321.80/oz.