WASHINGTON - Harsh winter conditions caused a significant decline in U.S. single-family home construction in January, disrupting projects across multiple regions. While a rebound is expected, potential headwinds in the form of rising costs due to tariffs and elevated mortgage rates could hinder recovery.

The Commerce Department's report on Wednesday reflected broader economic slowdowns in early Q1, mirroring the weather-driven distortions seen in retail sales and employment data. Part of the decline in housing starts stemmed from a natural adjustment after strong gains in November and December, which had followed rebuilding efforts after Hurricane Helene.

Though the demand for new homes remains high due to a shortage of previously owned houses on the market, new housing developments are facing economic pressures. Protectionist trade policies under President Donald Trump’s administration threaten to push up costs for builders, making it difficult to launch new projects.

“The outlook for more homebuilding is cloudy and gray as import tariffs are likely to push up building costs in the months to come, and homebuyers report the higher cost of borrowing is holding them back from being able to afford and purchase a new home,” said Christopher Rupkey, chief economist at FWDBONDS.

Housing Starts Take a Hit Amid Severe Weather

Single-family housing starts, which comprise the majority of new home construction, declined 8.4% to a seasonally adjusted annual rate of 993,000 units in January, according to the Commerce Department’s Census Bureau. December figures were revised upward, indicating an increase to 1.084 million units from the previously reported 1.050 million units.

The impact of severe snowstorms and freezing temperatures was evident in housing start declines across the Northeast, Midwest, and South. However, the West saw a 24.9% surge in homebuilding, despite ongoing challenges such as wildfires in California.

On an annual basis, single-family housing starts were down 1.8%, highlighting the broader difficulties facing the sector. The rising costs of borrowing and materials, such as lumber and appliances, continue to weigh on builders. New home construction remains reliant on imported materials, and recent tariff hikes are exacerbating cost pressures.

Trump had imposed an additional 10% tariff on Chinese imports early in his presidency, and a planned 25% tariff on imports from Mexico and Canada was temporarily suspended until March. This month, tariffs on steel and aluminum imports were raised to 25%, with the administration exploring reciprocal tariffs on countries that tax U.S. goods.

Economic Ripple Effects and Builder Sentiment

The latest data prompted reactions in financial markets, with Wall Street stocks declining, the dollar holding steady, and U.S. Treasury yields rising.

Builders are already bracing for the financial impact of tariffs. Expectations of higher costs have driven up lumber prices, contributing to declining builder confidence. A National Association of Home Builders/Wells Fargo Housing Market Index survey showed a steep decline in sentiment, reaching a five-month low in February.

The report highlighted that “with 32% of appliances and 30% of softwood lumber coming from international trade, uncertainty over the scale and scope of tariffs has builders further concerned about costs.”

Further exacerbating the issue, mortgage rates remain a deterrent for buyers. The average 30-year fixed-rate mortgage hovers just below 7%, despite the Federal Reserve having cut interest rates by 100 basis points since September. The Fed paused rate cuts in January as it assessed the economic effects of Trump’s fiscal policies, including tax cuts and mass deportations—measures that some economists warn could drive inflation.

Labor Shortages and Inventory Concerns

The impact of mass deportations on the labor force has raised concerns among homebuilders. With many construction workers being immigrants, industry experts note disruptions in project timelines.

“Anecdotally, we continue to hear reports that illegal workers are not showing up to work due to fear of being caught and deported by ICE (Immigration and Customs Enforcement),” said Richard de Chazal, macro analyst at William Blair.

Meanwhile, the housing market is experiencing an inventory glut reminiscent of levels seen in late 2007. The oversupply of newly built homes further complicates the outlook for builders, who may struggle to justify new projects if demand softens due to high prices and borrowing costs.

Multi-Family Housing and Future Projections

Starts for multi-family housing projects—buildings with five or more units—dropped 11% to a seasonally adjusted annual rate of 355,000 units. The sector, which experienced a boom post-pandemic, is stabilizing as rental demand levels off.

Overall housing starts fell 9.8% to an annual rate of 1.366 million units, below economists’ expectations of 1.390 million units. Compared to a year ago, starts were down 0.7%. However, residential construction spending rebounded in Q4 after two consecutive quarterly declines.

Goldman Sachs revised its Q1 GDP growth forecast, lowering expectations from a 2.0% annualized rate to 1.9%. In contrast, the economy grew at a 2.3% rate in Q4.

Permits for future single-family home construction remained unchanged at 996,000 units in January, while multi-family permits fell 1.4% to 427,000 units. Overall, building permits inched up 0.1% to a rate of 1.483 million units, but they were down 1.7% from a year ago.

Meanwhile, the number of single-family homes approved for construction but not yet started increased 2.8% to 145,000 units, and single-family home completions jumped 7.1% to 982,000 units. However, the inventory of single-family housing under construction declined slightly, falling 0.5% to 641,000 units.

Looking ahead, builders are prioritizing completing existing projects over initiating new ones. “Builders continue to prioritize working through the still-sizable, but shrinking, backlog of projects rather than increasing the pace of starts,” said Daniel Vielhaber, an economist at Nationwide. “This should lead to housing starts remaining somewhat tepid in the coming months.”

Originally reported by Lucia Mutikani in Reuters.