Implications: After starting 2018 with a bang, housing starts took a breather in February. Starts fell 7% in February to a 1.236 million annual rate, and are now down 4% from a year ago. However, the weakness in today's headline number came exclusively from the very volatile multi-unit sector, where starts fell 26.1% after rising 25.6% in January. Meanwhile, single family starts rose 2.9% in February, and continue to be the main driver of trend growth, as the chart to the right shows. The transition to more growth in single-family construction than multi-family is good news for the overall economy. On average, each single-family home contributes to GDP about twice the amount of a multi-family unit. Even though permits for new construction fell 5.7% in February, driven primarily by authorizations for multi-unit buildings, the horizon continues to look bright for future activity. Permits are up from a year ago for both single-family and multi-family units. Meanwhile, the number of units currently under construction and the rate at which developers finished building homes, which frees them up to take on new projects, are both at their fastest post-recession pace. Notably, this has all happened despite a significant uptick in mortgage rates in the past year, which some analysts claimed would derail the housing recovery. Based on population growth and "scrappage," housing starts should eventually rise to about 1.5 million units per year. And the longer this process takes, the more room the housing market will have to eventually overshoot the 1.5 million mark. Although tax reform trimmed the principal limit against which borrowers can take a mortgage interest deduction to $750,000 versus the prior amount of $1 million, the law only affects new mortgages. Large reductions to marginal tax rates in the early 1980s, which reduced the value of the mortgage interest deduction, coincided with a rebound in housing. In other words, we don't expect the changes in the deduction to cause problems for the housing industry at the national level, although we do expect some shift in building toward regions with lower taxes and land prices. In other recent housing news, the NAHB index, which measures homebuilder sentiment, fell slightly to 70 in March from 71 in February, remaining at a historically elevated level signaling strong optimism from developers. On the employment front, new claims for jobless benefits fell 4,000 last week to 226,000, while continuing claims fell 4,000 to 1.88 million. These figures are consistent with continued healthy job growth in March, although at a pace that's likely to be slower than the rapid gains in February.
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