Posted by Leonard Steinberg on February 25th 2014

Has the success of the housing market in the past few years been a result of ultra-cheap money and artificial demand because REIT’s and investors have bought large swaths of housing stock? Housing starts in the U.S. dropped in January by the most in almost 3 years as the brutal winter weather added to the industry’s burdens. Is extremely cold weather an economic depresser?

Builders began work on only 880,000 homes at an annualized rate last month, down 16% from December, according to data from the Commerce Department. The decrease was the biggest since February 2011. Another report showed wholesale prices remained constrained. The coldest January in two decades limited groundbreaking as construction in the Midwest dropped to a record low, indicating homebuilding will contribute less to economic growth at the start of 2014. The outlook for the rest of the year will hinge on whether hiring picks up enough to overcome declining affordability as mortgage rates and property values climb.

Work on single-family houses dropped 15.9% to a 573,000 rate in January, the fewest since August 2012, from 681,000 the prior month. Construction of multifamily projects such as condominiums and apartment buildings declined 16.3% to an annual rate of 307,000, a three-month low.

If economies surge in seven year cycles, we are about 5 years into this cycle. The USA creates around 1,3million households annually, which would mean building 880,000 homes will not meet the demand. While many argue against raising the minimum wage, as many wonder why more people simply cannot afford the housing that is being built as land prices have soared, forcing the cost of building a home higher. Severe cold spells add further to costs by slowing construction. Labor costs in many large cities have soared, as have the materials to build: The average union construction worker in New York earns about $ 65-70/hour including benefits…..how on earth does this allow you to build affordable housing?

So as the cold begins to show signs of dissipating, we will probably only be able to know around April whether the Spring thaw will boost the housing market or not. One thing is for certain: warmer weather will accelerate the pace of construction.