U.S. Housing Starts Dropped Sharply at the End of 2017 -- Update

The number of housing units that began construction fell sharply at the end of 2017, but still capped a solid year of new single-family home construction that could soon relieve rising home prices.

Housing starts fell 8.2% in December from a month earlier to a seasonally adjusted annual rate of 1.19 million, the Commerce Department said Thursday. Residential permits, which can signal how much construction is queued up, also fell, dropping 0.1% to an annual pace of 1.30 million last month.

Last month's housing starts decline came after two strong months of growth that stemmed from rebuilding efforts occurring in the wake of hurricanes that ravaged the southern and eastern U.S. Such large back-to-back growth usually isn't sustainable and appears to have corrected back to a normal level in December. Economists surveyed by The Wall Street Journal had expected a decline, but a smaller drop at 1.5% for housing starts and a larger 0.8% decline for permits.

December also saw inclement winter weather in the South and East that likely significantly impacted home construction. The South saw housing starts drop 14.2% and the Northeast dropped 4.3% to the lowest level since May 2017.

"Starts were always likely to correct after overshooting... But the severe weather in late December likely did extra damage, and the first half of January likely will be depressed too," Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients.

Housing-starts data can be volatile from month to month and can be subject to large revisions. Looking past monthly volatility, starts were up 2.4% in 2017 when compared to 2016, and permits increased 4.7% in the same period, signaling solid construction in 2017 that coincided with rising demand that has pushed up prices amid a chronic homes shortage.

The median sales price for existing homes hit $248,000 in November, up 5.8% from a year earlier, which is a more rapid rise than both inflation and wage growth.

But construction of new single-family homes appears to be ramping up at a solid pace. Permits and starts both increased by about 9% in 2017 from the previous year.

"Should more construction come about, the much needed additional inventory will help calm home price appreciation. That would be a good trend for housing affordability," National Association of Realtors chief economist Lawrence Yun said in a press release.

New residential construction hit a postrecession high in October 2016 but has trended lower since as multifamily construction has declined. It remains far below the levels reached during the years leading up to the 2008 financial crisis.

Labor shortages, rising land costs and increasingly restrictive land-use regulations have helped create a shortage of inventory that is driving up home prices much more quickly than wages and inflation.

Still, home builders are feeling upbeat about the housing market. The National Association of Home Builders' Housing Market Index, which gauges home builder sentiment about the market for single-family homes, fell in January, but remained near an 18-year high.

Write to Sharon Nunn at sharon.nunn@wsj.com

(END) Dow Jones Newswires

January 18, 2018 11:27 ET (16:27 GMT)