New U.S. home construction dropped in January to the lowest level in five months, underscoring the ongoing challenges facing the housing market.
Housing starts tumbled 14.8% last month to an annual rate of 1.33 million units, according to new U.S. Department of Commerce data released Friday. That is well below Refinitiv economists' forecast for a pace of 1.46 million units.
It marked the lowest level for housing starts since August 2023, and the biggest one-month drop in construction since the early days of the COVID-19 pandemic.
Applications to build – which measure future construction – also slid in January, falling 1.5% over the course of the month to an annualized rate of 1.47 million units. Compared with the same time last year, building permits are up about 8.6%.
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"A home building revival is coming, but it didn’t arrive in January," said Robert Frick, corporate economist at Navy Federal Credit Union. "High mortgage rates, with maybe a dash of cold weather, caused starts and permits to fall from December. We know that builders are ready to ramp up when rates fall, which could be as soon as spring."
The housing market is grappling with an astronomic rise in mortgage rates over the past two years, but bad weather in many parts of the country may have weighed on growth last month.
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"The downside surprise from the housing indicators in January looks mostly weather-driven, like the month’s weak retail sales and industrial production," said Bill Adams, chief economist for Comerica Bank. "One sign of this, building permits fell much less than housing starts in the month – it’s easier to file paperwork in a snowstorm than to break ground on a new home."
The data comes one day after the National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, rose for the third straight month to 48. Any reading below 50 is considered negative.
Sentiment among builders began steadily falling at the end of the summer after mortgage rates shot above 7%, throttling demand among would-be homebuyers. But borrowing costs have retreated over the past two months as the Federal Reserve has signaled that it is finished raising interest rates and will pivot to cutting them sometime this year.
"While mortgage rates still remain too high for many prospective buyers, we anticipate that due to pent-up demand, many more buyers will enter the marketplace if mortgage rates continue to decline this year," said Alicia Huey, NAHB chair and a custom homebuilder and developer from Birmingham, Alabama.
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Rates on the popular 30-year fixed mortgage are currently hovering around 6.77%, according to Freddie Mac, down from a high of 7.79% at the end of October but well above the pre-pandemic average of 3.9%.
