February 19, 2025

Housing starts plunged by 9.8% in January to 1,366 thousand after having jumped 16.1% in December.  While a dramatic decline it was not unexpected given the brutally cold, snowy weather that existed in that month and the wildfires that devasted much of the Los Angeles area.

Builder confidence has risen slightly in recent months.  However, homebuilders are worried about the imposition of tariffs, still high mortgage rates, and the cost of materials so their confidence may not return fully until such issues are resolved.  With 32% of appliances and 30% of softwood lumber coming from international trade, uncertainty over the scale and scope of tariffs has builders concerned about costs.

Housing affordability depends on three factors — mortgage rates, home prices, and consumer income.  Mortgage rates should  decline from 6.8% currently to 6.2% by the end of this year..  Home prices may remain at roughly their current level as the shortage of available housing puts upward pressure on prices..  At the same time, consumer income will continue to climb as jobs are created and hourly earnings steadily climb.  As a result, housing affordability should increase somewhat as the year progresses.  A median-income family today has 2% more income than is required to purchase a median-priced home.  We believe that by the end of this year that same median-income earning family will have 15% more income than is required to purchase a median-priced home.  That should help.

Potential home buyers today cannot find an adequate supply of existing homes to purchase.  The supply of existing homes on the market has risen in recent months but it still remains low.  The problem is that current owners have been unwilling to trade a 3.0-3.5% mortgage rate for a 6.8% one.  But recent data suggest that they now feel they have waited long enough and are willing to pull the trigger and sell.

Building permits — which are less volatile than starts — rose 0.1% in January to 1,483 thousand after having declined 0.7% in December.   It is difficult for builders to find an adequate number of workers and available lots at affordable prices.  This will curtail the number of houses that builders are able to start. However, in our opinion, the housing sector has hit bottom and will increase slowly in the months ahead.  With permits in recent months consistently between 1,450-1,500 thousand, starts should be at roughly that same level .

Our best guess is that starts will increase about 6.0% in 2025 to 1,600 thousand or so by the end of this year.

We currently expect GDP growth of 2.5% growth in the first quarter and 2.8% in 2025..

Stephen Slifer

NumberNomics

Charleston, S.C.