U.S. builders struggling to meet housing demand

Groundbreakings on new homes jumped 9.7% last month to the highest level since October 2016, which is welcome news for a U.S. housing market struggling with a shortage of homes for sale.

The Commerce Department said Friday that housing starts came in at an annual pace of 1.33 million in January, up from 1.24 million a year earlier and 1.21 million in December. Construction of single-family homes rose 3.7%. Construction of apartments and condominiums shot up 19.7%—the most since December 2016.

Home construction in the U.S., broken up by region, soared 45.5% in the northeast, rose 10.7% in the west and grew 9.3% in the south. Homebuilding dropped 10.2% in the midwest.

Building permits, an indicator of future construction, rose 7.4% in January.

Rising consumer confidence

A strengthening economy has given more Americans the confidence to shop for homes. But, despite last month’s uptick, builders haven’t been putting up homes fast enough to meet demand.

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A shortage of houses on the market has driven up prices and blunted sales. Standard & Poor’s reported last month that U.S. home prices rose 6.2% in November from a year earlier, according to its CoreLogic Case-Shiller national home price index. And, sales of existing homes fell 3.6% in December, though sales rose slightly for the full year 2017 from 2016, according to the National Association of Realtors.

Meanwhile, mortgage rates are creeping up. The rate on the benchmark 30-year fixed-rate mortgage rose to 4.38% this week, the highest level since April 2014.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted that apartment construction is notoriously volatile. He expects it will drop in February after the January surge.

Construction of single-family homes in January was “much less exciting […] the underlying story here is that housing construction is grinding slowly higher, and likely will continue to do so through mid-year at least,” Shepherdson wrote in a research note.

“Higher mortgage rates are likely to become a problem later in the year,” he added.

Still, builders are optimistic about the outlook for housing. The National Association of Home Builders/Wells Fargo builder sentiment index released Thursday read 72 for the second straight month in February, just shy of the 18-year high for optimism recorded in December. (Readings above 50 indicate more builders see sales conditions as good rather than poor; the index has been above 60 since September 2016.)

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