Mild Weather Boosted December Housing Starts

New residential construction, known as housing starts, came in at a seasonally adjusted annual rate of 1.6 million in December, the highest since December 2006, pre-housing crisis. Compared to November data, which were revised slightly higher, December housing starts climbed 17%. Compared to December 2018, housing starts climbed 41%. Unseasonably mild winter weather provided an extra boost to starts in December, evidenced by the 56.5% gains we saw in single-family starts in the Midwest. Some of that unusual strength will be given back at the start of the year, but the trend in housing is in the right direction.

Single-family construction hit 1.06 million units in December; the last time single-family construction hit a million units was before the housing bust. As mentioned above, the surge occurred in the weather-sensitive Midwest. The South, which is the largest market, also posted solid gains. Raleigh, Nashville, Charlotte, Denver and Austin have seen a wave of domestic migration over the last year due to increased job opportunities and lower housing costs. There are not enough existing homes in these hot job markets to fill the demand, so builders have had to ramp up production, especially through the second half of 2019.

Multifamily construction surged to 553,000 units, a record last seen in the 1980s. There is a big need for entry-level housing in the most populous regions, including the Northeast and the West, which is where the bulk of the activity occurred in December.

Housing permits rose almost 6% to 1.42 million units on an annual basis. Permits were at a multi-year high in the fourth quarter, underscoring our view that new home construction will remain strong at the start of 2020.

Mortgage applications to purchase homes were up almost 16% at the end of the second week in January, while refinance applications rose 43%. This was the biggest jump in applications in over a decade.

Bottom Line
With mortgage rates low and consumer confidence high, we expect the strong demand for housing, especially at the entry-level, to continue in 2020. While builder confidence is high, there are issues with finding enough workers to build these units quickly; the tight labor market and tighter immigration restrictions will place limits on construction.

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