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Housing Starts Drop in February, Coronavirus a Potent Threat

·4 min read

The U.S. housing starts took a step back in February after surging for trailing four months, thanks to sharp decline in the construction of multifamily housing units. Building permits also tumbled from 13-year high numbers reported in January. Nonetheless, both the metrics came ahead of analysts’ expectation by 6.3% and 1.5%, respectively.

Let’s delve into the numbers to get a clear picture of the current market condition.

Key Takeaways

On Feb 18, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly reported that housing starts fell 1.5% to a seasonally adjusted annual rate of 1.599 million units in February from the previous month’s revised 1.624 million units. A 6.7% rise in single-family housing starts was overshadowed by a drop of 17% in the multi-family homebuilding units.

In February, privately-owned housing starts fell 41.4% and 18.2% from January levels in Northeast and West, respectively. However, the metric increased in the Midwest and South regions, by 16.7% and 15.2%, respectively.

Building permits for the said month also dropped 5.5% to 1.464 million units from January’s revised 1.550 million units.  Single-family authorizations inched up 1.7%, which was more than offset by 18.3% decline in multi-family segment.

Both the metrics rallied 39.2% and 13.8% from year-ago period’s figure, respectively.

U.S. Housing Trends to Struggle Despite Solid Fundamentals

Post torrid 2018 market conditions, the U.S. homebuilding industry strengthened in 2019 on low mortgage/interest rates, strong job market and wage growth along with fairly unseasonably warm weather. Record low existing homes for sale and sturdy underlying market demand have boosted the performance in the overall industry. In fact, homebuilders’ sentiments were strongest in December 2019 at 76 since June 1999.

However, the pandemic started gnawing the world economy after the first case, which was reported in Wuhan city of China. So far, almost 9,000 people have died due to this contagious respiratory disease throughout the world.

Importantly, February’s drop in building permits depicts builders’ inability to ramp up construction even though borrowing costs have been declining steeply after hitting 3.36% in Mar 12 week from year-ago period’s levels. Notably, new weekly mortgage rate for the week ending Mar 19 is yet to get released today. Moreover, confidence level among single-family builders also fell two points in March from February’s reading of 74. (Read more: Builders Sentiments Slip in March as Coronavirus Fears Rise)

In spite of lower rates, mortgage applications declined 8.4% in the week ending Mar 18 from a week earlier (on a seasonally-adjusted basis), according to a Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey.

Joel Kan, MBA's associate vice president of Economic and Industry Forecasting, stated, "The ongoing situation around the coronavirus led to further stress in the financial markets late last week, with unprecedented volatility and widening spreads.”

Although the recent starts data does not conclusively reflects on the mounting economic effects of the pandemic, but market pundits are anticipating a U.S. recession by the second quarter of this year.

However, in the wake of escalating Covid-19 crisis, the U.S. Federal Reserve or Fed took the most dramatic step since the 2008 financial crisis and announced that it will cut its target interest rate near zero. This will take the target range for the federal funds rate down from the 1-1.25% range to the 0-0.25% range.

Although solid demand and supply shortages create market opportunities for single-family builders, the coronavirus outbreak is a pressing concern for the entire industry. Shares of notable single-family builders like Meritage Homes Corporation MTH, Toll Brothers, Inc. TOL, KB Home KBH, Taylor Morrison Home Corporation TMHC and M/I Homes, Inc. MHO have declined 55.3%, 62%, 67.7%, 67.7% and 75.3%, respectively, in the year-to-date period.

The Zacks Building Products - Home Builders industry declined 43.4% so far this year along with the Zacks Construction sector and S&P 500 composite’s 36% and 21.4% fall, respectively.

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