Housing Starts Finish 2014 Strong

Housing starts rebounded in December to a 1.089 million-unit pace, with upward revisions to November. The single-family market was particularly strong, though permits indicate more modest growth ahead.

Growth Moving Away From Multifamily Market

Housing starts ended 2014 at a 1.089 million-unit pace, while November’s number was revised upward. Starts were 5.3 percent higher in December than a year ago. Although multifamily starts in 2014 accounted for the highest share of starts since 1985, growth in the multifamily sector is beginning to wane. Migration toward more urban areas and movement toward rental properties had bolstered this trend amid weak and, at times, uncertain home prices. Now that trend appears to be reversing. Singlefamily starts rebounded in December, pushing starts 7.9 percent higher than a year ago. Multifamily starts, on the other hand, were only 0.6 percent higher than a year ago after falling for the second straight month. The pace of multifamily starts is near its prerecession peak and growth will look more modest moving forward relative to the strong rebound over the past few years.

This relatively new trend was also reflected in the permits data. Multifamily permit growth is tapering off after a strong rebound, while single-family permits are rising again, albeit relatively slowly. Single-family permits were 8.1 percent higher than a year ago and multifamily permits were 9.9 percent lower. The data is notably volatile, but the trend is consistent even when smoothing out the data. Overall, permits are relatively weak and do not point to a surge in residential construction anytime soon. Total housing permits have declined for two consecutive months and are only 1.0 percent higher than a year ago. In addition, the pace of permits is running below starts (middle chart), indicating that December’s strength will likely result in some payback in future months.

Housing starts in the Northeast saw a huge jump of 51.8 percent over the year. This is unlikely to be the start of a broader trend given that permits in the region fell in December and are lower than a year earlier. The West also posted a monthly and year-over-year decline in permits, while starts made gains over the same periods. On the other hand, permits in the Midwest and South regions have posted strong gains, indicating that homebuilders are, thus far, relatively unbothered by the impending slowdown in oildependent states.

New home sales have struggled to see a substantial rebound and have been virtually flat for at least the past two years, giving homebuilders little confidence in unloading new inventory. In fact, homebuilder confidence declined slightly in January, with buyer traffic falling and future singlefamily sales looking weaker in the new year. With a rapidly improving labor market and mortgage rates sliding lower, housing demand should improve and, along with it, residential construction; however, gains are likely to remain modest.