U.S. homebuilding activity took a breather in December, registering a paltry 1,192k starts at an annualized rate, marking a decrease of 107k from the slightly upwardly revised November figure. The headline disappointed markets that expected a slight moderation to 1275k. Building permits, in contrast, surprised to the upside, clocking in at 1,302k in December.

Single family starts accounted for the decline, declining by 112k to 836k, from an upwardly revised (+18k) November reading. The more volatile multifamily segment saw building tick up by 5k to 356k, from a downwardly revised (-16k) November reading.

Single family permits rose for the fourth consecutive month, to a healthy 881k. Multi-family permits fell (-17k) to 421k.

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Activity in the South weighed heavily on the headline number (-96k), after November set a post-recession record for single-family starts. The other regions reported modest pullbacks in activity in the 3-4k range.

For the year as a whole, starts averaged 1207k, an increase of 30k (2.5%) from 2016 levels as gains in single family homebuilding (up 67k to 851k) more than offset the decline in multifamily units (down 37k). Permits also increased in 2017, rising by 51k to 1258k.

Key Implications

Today’s setback appears to be more of a blip in homebuilding activity rather than a beginning of a new trend lower. The decline follows two strong months that were partly boosted by previous delays resulting from hurricane activity. Moreover, housing construction in December was likely thwarted by heavy snowfall while an overarching scarcity of construction workers hangs over the market. Despite these factors, we remain of the view that homebuilding will continue to pick-up, albeit very gradually, supported by single family homebuilding.

New single family homes sales rose sharply and reached a post-recession record in November, indicating that demand is firmly intact as persistent wage gains and still-low mortgage rates facilitate home buying. That being said, the housing market is not sheltered from the effects of tax reform. The $10,000 cap on the state and local tax deduction, which includes property taxes, will impact demand in high-tax regions. Adding to this will be the lower cap on the mortgage interest deduction (down from $1M to $750k), which may put some downward pressure on high-priced markets including those in New York and the District of Columbia. The additional uncertainty may have led to a slight pullback in builder confidence in January. Nonetheless, optimism in the housing market remains within reach of the 18-year high hit in December.

Looking ahead, a shrinking pool of construction workers will be the biggest barrier to homebuilding in 2018, while rising mortgage rates and home prices will add further downward pressure. Despite this, a healthy labor market and accelerating wages will support demand, while tight inventories and rising prices will incentivize new homebuilding. As such, we expect residential investment to edge higher this year, led by particular strength in the single family segment.

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