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Spring Thaw May Not Heat up This Housing Market

Starts on new homes fell 16 percent in January, the biggest percentage drop in nearly three years.

Starts on new homes fell 16 percent in January, the biggest percentage drop in nearly three years. PAUL J. RICHARDS / AFP - Getty Images

The severe winter weather has been a convenient scapegoat for the slowdown in the housing market. While many analysts and builders predict a significant pickup in activity in the spring, slack demand may continue to define an uneven recovery — even as green grass replaces ice in the coming months.

The Commerce Department said Wednesday that groundbreaking on new homes last month tumbled 16 percent to a seasonally adjusted annual rate of 880,000 units, the lowest level since September. The percentage drop was the largest since February 2011. Starts for December were revised up to a 1.05 million-unit pace from the previously reported 999,000-unit rate.

Warmer weather could certainly get more people out looking, but with monthly payments potentially much higher this year, new buyers will have to clear a high bar.

"There must be low demand — that's what we're seeing," said Glenn Kelman, CEO of Redfin, an online real estate brokerage based in California. "We saw a huge spike in demand last year, which is why we were so confident the market had bottomed. ... We're not seeing the same thing this year, so even though there aren't many homes for sale, there aren't many buyers looking for them, either."

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Affordability, which was so favorable after the housing crash, dropped dramatically last year. Home prices rose from 6 percent to 14 percent, depending on different readings and whether or not distressed properties were included.

Suffice it to say, prices were up far more than historical appreciation, driven by all-cash investors on the low end and by returning midrange demand. Mortgage rates also jumped a full percentage point last year.

"When you have a 14 percent [price] gain and then a 1 point increase in mortgage rates working together, that will discourage some buyers, but there has also been a more fundamental shift in the psychology of the homebuyer," Kelman said. "Now you have folks who are very wary of what happened between 2008 and 2013. ... They're not going to buy a home and then feel like a sucker."

That — not weather — is why mortgage applications to purchase have fallen more than 50 percent from a year ago and why existing sales have been down for four straight months, he said.

However, a UBS report issued Wednesday bore the headline, "Despite the decline in traffic, the shape of the recovery is unchanged," and it seemed to dismiss this month's 22.5 percent drop in prospective buyer traffic in new homes.

"Now you have folks who are very wary of what happened between 2008 and 2013. ... They're not going to buy a home and then feel like a sucker.""We'd note that management teams have pointed out on recent earnings calls that community traffic has been solid in the early stages of the spring selling season," the UBS report said. "In turn, we continue to believe the recovery remains on track and look for the initial stages of the upturn to continue to unfold through 2014. That said, the pace of recovery is likely to remain uneven throughout the year."

"Now you have folks who are very wary of what happened between 2008 and 2013. ... They're not going to buy a home and then feel like a sucker."

Home sales and construction usually slow in the winter, and this one has been particularly rough in some regions. That has led analysts to cry "foul weather" after each poor reading. From home sales to builder sentiment to Wednesday's 16 percent monthly drop in housing starts, it must be the snow.

"We've had an exaggerated seasonality this year," said Bill Pulte, a member of the founding family of Pulte Homes who now runs a private equity firm specializing in the housing industry.

The argument doesn't hold up entirely, though. For one thing, this has not been the harshest winter in history — not even close, according to a report from Trulia. In fact, housing starts in the Northeast jumped pretty dramatically: 62 percent seasonally adjusted and nearly 9 percent unadjusted. Housing starts dropped in the West, where weather was not a factor. But, yes — one can blame the weather for poor starts in the Midwest.

But a hesitancy is apparent everywhere. The few who turned up at a K. Hovnanian open house in Northern Virginia over President's Day weekend (the unofficial start of the spring season) seemed more to be kicking the tires than seriously considering buying.

Steven and Amanda Schneider, who have a growing family, were interested but not highly motivated.

"I think there is a small possibility we would buy in the next year," Amanda said. "It does feel like everything is thawing a bit right now."