Housing starts dropped to a 1.16-million unit pace in February after a sharp upward revision to January. The swings in the single-family market were the largest, with a sharp drop both month-to-month and on a year-over-year basis in February.

Losses were broad-based with the exception of multifamily construction in the Midwest. Single-family housing starts fell across the board. The level of declines in the South was particularly large. Unusually harsh winter weather in the South likely contributed to those losses. The breadth of the weakness we are seeing goes beyond a lousy winter alone. Indeed, extreme weather conditions - record lows and highs - have become the norm.

Builders came into the year with a big bounce in expectations in response to lower mortgage rates. They upped their investment in speculative projects, but sales failed to materialize. That has left the market with an overhang of new home inventories, something we have not seen in recent years. That could be a plus for current home buyers because builders are quick to discount homes they can’t sell. However, that shift is hard to read as a positive for the overall economy.

Permits for housing construction moderated in February. The level of single-family permits was steady but remains more than 7% below a year ago and leaves little room for improvement in March. Multifamily permits fell but remain well above year-ago levels. That reflects the low level of affordability for millennials in the single-family market and the need to rent for longer.

Millennials want to own homes as much as previous generations, but economic losses they endured from graduating into a recession have forced them to delay marriage, childbearing and home-buying longer than earlier generations. It is critical to note that those delays are rooted in their economic circumstances, not a shift in preferences.

Separately, the S&P Corelogic Case-Shiller measure of home values slowed to a 3.6% pace on a year-over-year basis in January from a 4.1% pace in December. The Federal Housing Finance Agency (FHFA) price index held up better in January at the 5.6% year-over-year pace of December but below the highs earlier in the cycle when mortgage rates were lower.

Bottom Line

The housing market never fully recovered from the crisis and is once again cooling. Sales will likely do better than starts as we move into Spring. The downside is that recent applications suggest that those gains are concentrated in wealthier households. First-time buyers remain scarce and could be a signal of underlying weakness in the economy.