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  Housing Starts Declined 16.0% in January to 880,000 Units at an Annual Rate
Posted Under: Data Watch • Home Starts • Housing
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Implications: Home building plummeted in January. However, as predicted in yesterday's Monday Morning Outlook, the data on housing starts were just another victim of the polar vortex. Although national average temperatures were only a little below normal in January, that figure is weighted by region size, not population, and includes states that normally have mild winters. NOAA calculates Heating Degree Days (HDD) which ignores areas where the temperature is 65 degrees and above, and which weights the remaining areas by population. The higher the HDD index, the colder it is, and January 2014 had the highest HDD index for any January in 20 years. Not surprisingly, in January of 1994 housing starts plummeted by 17%. When it's this wet, cold and snowy it's nearly impossible to move dirt. In the Midwest, starts fell 67.7% in January to only 50,000 units at an annual rate. This is the lowest level ever recorded going back to 1959. Weather is why housing starts fell so much. To smooth out some of this volatility we look at moving averages, and the 4 month moving average of housing starts is the highest since July 2008. Some say weather is a minor factor and look to mortgage rates, but the US had a bubble in housing during 2003-07, when 30-year mortgage rates averaged 6.1%. Today, they are 4.4%. Adjusted for inflation, real mortgage rates are actually a little bit lower today than they were back in 2003-07. We remain convinced that the underlying trends for home building are strong and should remain in that mode for at least the next couple of years. The total number of homes under construction (started, but not yet finished) is up 27% from a year ago. Based on population growth and "scrappage," housing starts will eventually rise to about 1.5 million units per year (probably by the end of 2015). This is the level of construction that keeps the number of homes stable relative to the US population. In other housing news yesterday, the NAHB index, which measures confidence among home builders, came in at 46 in February, down 10 points from January. Builders cited weather as the primary reason for the drop. Also yesterday, the Empire State index, a measure of factory sentiment in New York, declined to +4.5 from +12.5 in January. This signals continued growth in factory activity despite the weather.

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