Is the Housing Market Flashing a Warning Signal?

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Housing starts in the United States declined in December, but managed to beat expectations as the industry posted an 18.3-percent gain from the previous year. According to the U.S. Department of Commerce, builders broke ground on houses at a seasonally adjusted annual rate of 999,000 units last month, down 9.8 percent from the revised November estimate of 1.11 million units. That is the biggest percentage decline since April. However, housing starts were 1.6 percent above the December 2012 rate of 983,000 units. On average, economists expected housing starts at around a 990,000-unit pace.

Single-family housing starts, the largest segment of the market, dropped 7 percent in December to an annualized rate of 667,000 units. It was the first decline since September. Breaking ground on multi-family homes with at least five units plunged from 380,000 units in November to 312,000 units in December.

Furthermore, new building permits — an indication of future demand — declined 3 percent from November to a seasonally adjusted annual rate of 986,000 million units. Building permits for single-family homes led the decline with a drop of 4.8 percent.

Construction began on 780,000 units in 2012, a significant increase from 608,800 units in the prior year, but still below the historic average of 1.5 million new homes per year since 1959. Housing starts peaked at 2.27 million units in early 2006, while the pace of home construction reached its low point in 2009, below 500,000 units. In 2013, an estimated 923,400 housing were started.

In a separate report released earlier this week, the National Association of Home Builders/Wells Fargo’s index of builder confidence edged just one point lower to 56 in January, compared to a December reading of 57. More builders have now viewed market conditions as good than poor for eight consecutive months. Any reading above 50 indicates that more builders view sales conditions as good rather than poor. In the five years before the Great Recession, the index averaged 54, and hit an all time low of 8 in early 2009.

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