New home construction is improving as builders work through the backlog of permits — but they face pressure from inflation, labor shortages and rising rates

Numbers: U.S. homebuilders began building homes at a seasonally adjusted annual rate of about 1.77 million in February, up 6.8% from revised figures for the previous month, reported Thursday the US Census Bureau. Compared to February 2021, housing starts increased by 22%.

Meanwhile, permits for new homes came in at a seasonally adjusted annual rate of about 1.86 million, down 1.9% from January. Nevertheless, permit activity increased by 7.7% compared to a year ago.

Economists polled by MarketWatch expected housing starts to come in at a median pace of 1.7 million and building permits to come in at a median pace of 1.85 million.

What happened: A 5.7% increase in single-family home starts drove the overall increase in new construction in February. Regionally, the Northeast saw the most notable improvement in housing starts with an increase of nearly 29% on a monthly basis, while the West was the only part of the country to see a decline of activity.

Permit activity declined for both single-family and multi-family housing projects in February. However, there was significant regional variation. There were more building permits issued in the North East and West on a monthly basis, with respective increases of 23% and 2%, in February. But permit activity declined in the Midwest and South.

The number of new housing units that were completed also increased in February, rising almost 6% from the previous month, which was entirely attributable to the growth in the number of single-family homes whose construction was completed.

The big picture: The increase in housing starts in February is a welcome improvement, which more than offset the decline of the previous month. Declining COVID-19 case numbers and improving weather conditions have helped homebuilders get back to work.

If the decline in permits continues, it could signal a more conservative approach among builders. The mood in the construction industry has taken a hit as inflation slashes profits and rising mortgage rates threaten demand. Builders already have a huge pool of permits to work with, so they have a long track. But they may choose not to proactively apply for permits for homes if they begin to fear housing demand will suffer as the cost of buying a home spirals into the stratosphere.

Look forward: “Pandemic-related worker absenteeism has eased, enabling progress in construction activity,” Priscilla Thiagamoorthy, economist at BMO Capital Markets, wrote in a research note.

“New residential construction is feeling the pressures of inflation, labor shortages and rising interest rates,” said George Ratiu, senior economist and director of economic research at Realtor.com. “Trends are also reflected in the stumbling sentiment of homebuilders.”

“The building permit glut that has accumulated during the pandemic due to material and labor shortages is a positive signal for construction ahead as supply bottlenecks are easing, although home buying intentions have started to decline with higher mortgage rates,” Katherine said. Judge, Director and Senior Economist at CIBC Capital Markets, in a research note.