U.S. homebuilding increased to a nine-month high in December amid a surge in multi-family housing projects, but soaring prices for materials after the government nearly doubled duties on imported Canadian softwood lumber could hamper activity.
The report from the Commerce Department on Wednesday also showed the number of homes authorized for construction but not yet started surged to a record high last month, underscoring the challenges builders are facing from supply constraints. Rising mortgage rates could also hurt homebuilding this year.
"Builders are gladly trying to meet demand, but supply problems and labor shortages are slowing them down," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto. "Softwood lumber duties are going to hurt this spring."
Housing starts rose 1.4% to a seasonally adjusted annual rate of 1.702 million units last month, the highest level since March. Data for November was revised slightly lower to a rate of 1.678 million units from the previously reported 1.679 million units.
Housing starts totaled 1.595 million in 2021, up 15.6% from 2020.
Economists polled by Reuters had forecast starts falling to a rate of 1.650 million units. The volatile multi-family housing segment accounted for the rise in homebuilding last month, with starts for buildings with five units or more surging 13.7% to a rate of 524,000 units. There is strong demand to rental housing.
Single-family housing starts, which account for the largest share of the housing market, dropped 2.3% to a rate of 1.172 million units last month. Single-family homebuilding soared in the Northeast and Midwest, likely boosted by unseasonably mild temperatures in December.
December 2021 was the warmest December on record, according to the National Centers for Environmental Information.
The densely populated South, where the bulk of homebuilding occurs, reported an 8.2% decrease in single-family starts. Homebuilding also fell in the West.
The outlook for home building this year is cloudy. The United States last November nearly doubled the duties on imported Canadian softwood lumber to 17.9% after a review of its anti-dumping and countervailing duty orders.
Huge backlog
The Trump administration initially imposed 20% duties on Canadian softwood lumber in 2018 after the collapse of talks on a new quota arrangement, but reduced the level in December 2020 to 9%. President Joe Biden's administration had stuck to those duties until the Commerce Department's November review.
According to the National Association of Homebuilders, the aggregate cost of residential construction materials had increased almost 19% since December 2021. The NAHB said higher material costs and shortages were adding weeks to typical single-family home construction times.
Prices for softwood lumber, used for framing, soared 24.4% in December after rising 6.9% in November, according to the latest producer price data.
The backlog of houses authorized for construction but not yet started shot up 1.1% to a rate of 270,000 last month, the highest on record.
Permits for future homebuilding jumped 9.1% to a rate of 1.873 million units in December.
Permits for buildings with five units or more soared 19.9% to a rate of 675,000 units. Single-family building permits rose 2.0% to a rate of 1.128 million units.
An acute shortage of homes available for sale is supporting homebuilding, but rising mortgage rates, supply constraints together with higher house prices could make home purchasing less affordable.
The 30-year fixed-rate mortgage averaged 3.45% during the week ending Jan. 13, up from 3.22% in the prior week, according to data from mortgage finance agency Freddie Mac.
Mortgage rates have risen as financial markets price in an interest rate increase from the Federal Reserve as early as March amid high inflation and a labor market that is at or near maximum employment.
"With mortgage rates already rising with several Fed rate hikes cocked and ready, this year is likely to be sideways at best for residential home builders," said Christopher Rupkey, chief economist at FWDBONDS in New York.
"It will be interesting to see if higher mortgage rates cool the housing bubble in prices because the lack of new supply will likely remain the dominant trend for another year."