Implications: Housing starts continued to slow in December, falling for a fourth consecutive month to close out 2022, which was a historically tough year for builders due to surging mortgage rates. However, some of the details beneath the surface were better than the headline. Multi-unit construction accounted for all the weakness in December, while single-family starts rose for the first time in four months and posted the largest monthly percentage gain in more than a year. It looks like the recent 100 basis point decline in 30-year fixed mortgage rates is improving the future sales outlook from developers. In fact, yesterday’s reading on homebuilder sentiment, as measured by the NAHB Housing Index, rose to 35 in January from 31 in December. Notably, this is the first increase in thirteen months and ends the longest streak of declines since records began in 1985. That said, an index reading below 50 still signals that more builders view conditions as poor vs. good. However, these data reinforce our view that the recent decline in mortgage rates has helped boost sentiment among developers. Though groundbreaking on new residential projects is now down 23.4% from the peak earlier this year, keep in mind that construction overall has hardly ground to a halt. Lots of projects were already in the pipeline, with the number of homes under construction at the highest level on record back to 1970. These figures also demonstrate a slower construction process due to a lack of workers and other supply-chain difficulties. Given that builders already have their hands full, it wasn’t surprising to see permits for new projects fall 1.6% in December. Housing isn’t going to be a source of economic growth in the year ahead, but do not expect a housing bust nearly as harsh as in the 2000s. In labor market news this morning, initial unemployment claims fell 15,000 last week to 190,000, while continuing claims rose by 17,000 to 1.647 million. Finally, the Philadelphia Fed Index, which measures manufacturing sentiment in that region, rose to a still weak reading of -8.9 in January from -13.7 in December. As we wrote in yesterday’s report on industrial production, we believe a recession is on the horizon in 2023 with the goods sector leading the way.
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