By Lucia Mutikani
WASHINGTON (Reuters) – US residential construction fell to almost two years in March, driven by persistent weakness in the individual family unit segment, suggesting that the housing market continued to struggle despite the drop in mortgage rates.
The second direct monthly decline in residential construction reported by the Commerce Department on Friday probably partly reflected massive flooding in the Midwest, with housing starts in the region plunging to levels last seen in early 2015.
The weak report countered a recent tide of bullish data, including retail sales, trade and construction spending, which indicated the economy rebounded at the end of the first quarter after seeming to stumble at the turn of the year.
"Waiting for construction activity to improve after a sharp drop in mortgage rates is like waiting for Godot," said Chris Rupkey, chief economist at MUFG in New York. "It's hard to know what's affecting the residential construction industry."
The start of housing fell 0.3 percent, to a seasonally adjusted annual rate of 1.139 million units last month, the lowest level since May 2017. February data were revised to show a growth of 1.142 million units instead of 1.162 million unit rate.
Housing starts in the Midwest, which was devastated by floods during the month, fell 17.6 percent. The construction of houses also fell in the Northeast and South, but emerged in the West.
Economists polled by Reuters predicted that housing starts would increase to a pace of 1,230 million units in March. The dollar was trading lower against a basket of currencies. US stock and bond markets were closed for the Good Friday holiday.
A sharp increase in home construction seems unlikely. Construction permits fell 1.7 percent to 1.269 million units in March, the lowest in five months. It was the third consecutive monthly drop in authorizations.
The prolonged weakness in residential construction is probably the result of shortages of land and labor as well as expensive building materials. A survey on Tuesday showed that while builders reported a strong demand for new homes, they continued to highlight "accessibility concerns stemming from a chronic shortage of construction workers and buildable lots."
These factors are limiting the ability of builders to build homes in the lowest price segment on the market, which continues to experience a shortage of homes for sale. The real estate market hit a soft pace last year with investment in residential construction contracting 0.3%, the weakest performance since 2010.
Despite the weakness in residential construction, the fundamentals for the real estate market are improving. The 30-year fixed mortgage rate fell from a peak of about 4.94% in November to about 4.12%, according to data from mortgage lender Freddie Mac. Wage growth is also strengthening.
Declining mortgage rates follow a recent Federal Reserve decision to suspend its three-year tightening campaign.
While housing remains subdued, other segments of the economy have recovered from previous weakness. Retail sales increased in March and data on trade, stocks and construction were also bullish, prompting economists to update their gross domestic product growth estimates for the first quarter.
Growth forecasts for the January-March quarter were raised to an annualized rate of 2.9%. They were at as low as a 0.3 percent rate after a batch of weak economic reports at the turn of the year. The economy grew 2.2% in the fourth quarter.
"The March numbers show that better economic conditions are not yet paying off for builders as the market is geared toward the spring shopping season," said Matthew Speakman, an economic analyst at Zillow.
Single-family residential construction, responsible for most of the housing market, fell 0.4 percent to a rate of 785,000 units in March, the lowest level since September 2016.
Licenses to build single-family homes fell 1.1 percent to a rate of 808,000 units in March, the lowest since August 2017. It was the fourth consecutive monthly drop in allowances for single families.
Maturities of the volatile multifamily housing segment remained unchanged at a rate of 354.00 units in March. Licenses to build multifamily housing fell 2.7 percent to 461,000 units last month.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)