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Recent housing starts data for Feb 2014 were almost flat owing to unfavorable weather and lack of lots and skilled labor.

Data released by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau showed that housing starts in February were 907,000, down from 909,000 in January.

Regionally, the combined housing starts data were mixed in February. The Midwest witnessed a 34.5% increase in housing starts while the South rose 7.3%. Housing starts declined 37.5% in the Northeast and 5.5% in the West. On the other hand, single-family housing construction increased 0.3% in February while multifamily starts declined 2.5%.

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) has also mirrored a similar sentiment with regard to the homebuilders’ confidence for newly-built, single-family homes. HMI jumped a point to 47 in March from 46 in February.  HMI remained below 50, which is the dividing line between expanding and contracting activity levels.

In fact, homebuilders remain concerned about the shortage of lots and skilled labor, rising cost of materials and declining level of new homes in inventory, which has decelerated sales since the second half of 2013. As a result, many companies saw declining order trends in the past quarter.

Orders declined around 18% at PulteGroup, Inc. (PHM - Analyst Report) and around 10.6% at Hovnanian Enterprises, Inc. (HOV - Snapshot Report) in the last reported quarter. Though order trends improved year over year for others like Toll Brothers, Inc. (TOL - Analyst Report) and D.R. Horton, Inc. (DHI - Analyst Report), they slowed down from the past quarter. KB Homes (KBH - Analyst Report) also witnessed soft order trends in the past 2-3 quarters. However, as the winter chill subsides, housing demand is expected to pick up with the onset of the spring selling season.

The spring selling season is expected to be encouraging on the back of favorable mortgage rates, affordable prices and overall improvement in economy. In fact, this is best reflected in recently released building permit data, which is an indicator of future home building activity.  

Released in March 2014, issuance of new building permits increased 7.7% in February. It may be noted that though multifamily permits increased 27.6%, single-family permits declined 1.8%.  

Despite stronger housing demand expected during the spring selling season, the supply side of the housing industry remains volatile, owing to lack of lots and labor, rising cost of materials and declining level of new homes in inventory. We will wait and see if the new housing starts data for Feb 2014, to be released on March 25, offers an encouraging outlook for the housing industry.     

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