Housing starts fell more than expected to a 1.24 million unit rate in February. All of that decline occurred in the multifamily sector, which has become overbuilt and resulted in rent compression in some markets; the downdraft in rents was large in February.
Declines in housing starts were widespread across regions. The Midwest, which is small relative to the total, was the only region to see an increase in multifamily construction.
Single-family home construction increased during the month. The largest gains were in the West, with increases of nearly 25% from a year ago. California is considering zoning law changes that could expedite building permits in certain areas. This is critical as changes in zoning and sharp increases in the costs of land for developers has inhibited their ability to move downstream and build more entry-level properties in recent years.
Single-family home construction remains below the level needed to meet demand. Much of the recent weakness in home sales - new and existing - can be attributed to unusually tight inventories. The result has shown up in a sharp acceleration in home values that my contacts in the housing industry say is not reflected in the overall inflation data.
The shortfall in housing starts for February is not expected to be reversed in March. Unusually harsh winter weather blanketed much of the East Coast during the first two weeks of this month; that will dampen the usual surge in construction activity in Spring. It will also have an impact on the employment report for the month of March, due to be released in early April.
The result further lowers our estimate for real GDP growth in the first quarter. We could easily slip below the 2% threshold after surging close to a 3% pace in the fourth quarter.
The rise in the construction of single-family homes during February is welcome news but not enough to make up for acute shortages in inventories. The shortfall in overall housing starts will show up in weaker real GDP growth in the first quarter.