Decline in Housing Starts a Temporary Setback? - Analyst Blog

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Housing starts tumbled to their lowest levels in almost a year in February as housing recovery slowed down due to harsh winter weather in the first quarter.

Data released by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau on Mar 17 showed that housing starts declined 17% to a seasonally adjusted annualized rate of 0.897 million units in February from a much higher January number of 1.081 million units. Analysts were expecting starts to be around 1.04 million units.

Moreover, housing starts declined 3.3% year over year. Single-family housing starts dropped 14.9% in February while multi-family starts fell 20.8%.

Severe winter conditions, which seasonally slow down construction activity at the beginning of the year, were largely responsible for the decline.

Shares of large homebuilders like PulteGroup Inc.PHM , Lennar CorporationLEN , D.R. Horton, Inc.DHI and Toll Brothers, Inc.TOL declined slightly on Tuesday on softer data.

Wilting Confidence

Adding to the negative sentiment, a report released a day before showed a decline in confidence among homebuilders in March for the third consecutive month. Homebuilders' confidence for new single-family homes, as indicated by the National Association of Home Builders (NAHB)/Wells Fargo housing market index (HMI), dipped two points to 53 in March from the prior month.

NAHB Chief Economist David Crowe blamed the February HMI dip to land and labor shortages as well as tight underwriting standards.

We believe the softer consumer confidence in February along with a measure of uncertainty in the economy have led to a lull in housing activity lately. The Consumer Confidence Index declined in February after a huge increase in January.

Analysts, in general, are not too worried about the housing setback. They tend to see it as a passing phase and expect housing starts to climb in March as weather turns more favorable and the spring selling season sets in. Moreover, both consumer and home builder confidence are expected to improve as the U.S. economy becomes more and more stable.

Underscoring the optimism, the number of building permits - a gauge of future constructions - actually increased 3% in February from the prior month. This is an encouraging sign though driven by applications for multifamily units. Building permits for single-family homes declined 6.2% in the month.

Pending home sales also reached its highest level since Aug 2013 in January this year, per data released in early March by the National Association of Realtors.

The spring selling season generally brings in improving sales trends. Higher job numbers, a reassuring economy, moderating home price gains, affordable interest rates, rising rentals and a limited supply of inventory all point to an inevitable pickup in housing.

As demand stabilized, housing price gains slowed in 2014, which is expected to continue in 2015.

Moreover, analysts are predicting that with rising home prices, it will be difficult for Millennials to pay the downpayment, which has been rising too. So instead of buying they will rent, in turn increasing rents.

Even if mortgage rates rise in the latter half of the year - as is widely anticipated - these should still remain reasonable.

To add to the positives, plans from the White House to cut premiums on mortgage insurance should encourage home buying among first-time homebuyers.

With oil prices continuing their downward journey and an economy largely on the mend, the desire to own new homes will get a shot in the arm.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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