Housing Starts See Sudden Decline Despite Employment Gains

A fall in unemployment rate has not caused more demand for residences, as housing starts suddenly declined in February.

Private housing starts fell to a seasonally adjusted annual rate of 897,000 in February, far below expectations of 1.04 million starts, according to a report released by the U.S. Census Bureau.

A fall in unemployment rate has not caused more demand for residences, as housing starts suddenly declined in February.

Private housing starts fell to a seasonally adjusted annual rate of 897,000 in February, far below expectations of 1.04 million starts, according to a report released by the U.S. Census Bureau.

The largest decline was in single-family units, which fell 6.2% month-over-month but gained 2.8% year-over-year. Continued cold weather is partly to blame for the fall in northeast housing starts, which fell 17.4% month-over-month. However, weather in February was warmer than a year ago, yet the region saw a 6.5% decline in new housing starts on a year-over-year basis.

Weakness was across all regions in single-family housing starts, falling on a month-over-month basis in the Midwest and South. While the West saw single-family units increase by 5.6% month-over-month in February, expectations were for a stronger housing market thanks to growing strength in the labor market.

Unemployment Rate Falls

A new report indicates that unemployment fell in nearly half of the states in the U.S., with twenty-four seeing a month-over-month decline in unemployment in January from the prior month. Despite weakness in the energy market, the sector helped North Dakota achieve the lowest unemployment rate in the country, below 3%. Washington D.C. had the highest rate, at over 7%.

The Midwest has the lowest overall unemployment rate for any region, at 5.2%, while the West had the highest, at 6.3%.

The divergence between unemployment trends and housing demand may indicate less demand for homes at lower income brackets, where job insecurity and stagnant wage growth has kept many potential buyers out of the market. In addition, tight credit and low loan-to-value maximums have also made it difficult for many low-income earners to afford a home.

Inflation Hopes

With falling unemployment, many economists became more optimistic about a reversal of recent disinflation, with wage gains likely to follow months of employment gains.

However, some analysts are warning that the Phillips curve, which says higher wages follow lower unemployment, is questionable after two years of consistent labor gains met with wage growth of less than 1.5% annualized. In a recent editorial, Bloomberg News editors noted that states with low joblessness no longer see higher wage gains than states with high joblessness, although the correlation held steady in the 1980s.

While wages continue to flat-line, some inflation hawks warn that it is just a matter of time before incomes rise and a wage-price spiral traps the U.S. economy. St. Louis Federal Reserve president James Bullard has recently warned that the Fed needs to raise its rate target before wages begin to increase. Some economists think wage growth is likely to accelerate by the end of the year.