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ousing starts declined in January, and builders' optimism about the next six months has waned due to concerns over rising costs and labor shortages. The sector's momentum from late 2024 appears to have stalled as builders grapple with material costs, labor shortages, and mortgage rates.
New projects are slowing down: Housing starts dropped 9.8% in January compared to the previous month and fell 0.7% year-over-year, according to the U.S. Census Bureau. Single-family home starts declined 8.4% month-over-month and 1.8% year-over-year. Building permits remained flat for the month but decreased 1.7% from a year ago.
However, housing completions showed a glimmer of hope, increasing 7.6% from December to January and 9.8% year-over-year. Builders are now facing a growing gap between completions and starts, which suggests some pessimism about the near future but also optimism about the current market despite high mortgage rates.
Builder confidence has taken a hit: After rising for five months, builder sentiment dipped five points in February to 42, according to the NAHB/Wells Fargo Housing Market Index. The biggest drop was in sales expectations for the next six months, which fell 13 points, possibly explaining the slowdown in housing starts. Builders are also scaling back incentives like price cuts, with only 26% offering discounts in February.
New federal policies and immigration restrictions have added to builders' concerns. The construction sector relies heavily on immigrant workers, who make up 13% of its workforce, according to census data compiled by Pew Research. Realtor.com Chief Economist Danielle Hale warned that the impact of immigration restrictions could be felt acutely by the construction industry.
Despite these challenges, there are reasons for builders to remain hopeful. Existing home inventory remains limited, and the Federal Reserve may ease rates in the second half of the year. Lower borrowing costs could provide some relief, but builders know that higher mortgage rates will keep buyers cautious.
