Housing starts pulled back in January following a spike in December. The number of starts in January declined by 9.8%, driven by declines in both single-family and multifamily homes. December’s figure was revised upward to 16.1%.
The data suggests that the decline was not just a normal pullback from December’s spike. In addition to still-elevated mortgage rates, severe weather across the country was an important factor affecting housing starts.
But these one-time seasonal factors should subside. Permits for new buildings and homes held up in January despite weather-related headwinds, rising by 0.1%.
The decline in housing starts allowed builders more opportunities to complete existing projects, with the number of completions rising by 7.6% on the month to 1.65 million on an annualized basis.
While that is an encouraging number, we remain below the non-inflationary threshold for the long-term supply of new homes needed to balance growing demand.
Our estimates indicate that about 1.7 million new homes are needed annually to keep prices under control. January’s starts came in at only 1.36 million on an annualized basis, while permits stood at 1.48 million.
Read more of RSM’s insights on the real estate industry and the middle market.
Looking ahead
With the new administration lacking a strong focus on housing policy, we do not expect the imbalance between housing supply and demand to ease anytime soon.
Housing inflation remains a challenge for the Federal Reserve in its efforts to bring inflation back to the 2% target.
Tighter immigration policies and higher material costs because of tariffs will only add more pressure on housing prices.
As a result, the Federal Reserve will most likely keep interest rates restrictive, keeping mortgage rates elevated. This means the issue of housing unaffordability won’t go away as quickly as Americans hope.
