A Troubling Divergence In The US Housing Market

Update: We have a follow up to this post.

The January housing starts report is scheduled for release at 8:30 a.m. ET tomorrow. Economists expect housing starts to decline to a pace of 914,000 units.

Millan Mulraine at TD Securities is looking for a print of 910,000 units because of the "cold snap across the country during the month." He expects permit approvals however to rise to 920K.

One of the few concerns about U.S. housing recovery is that building has been outpacing the sales of new homes. As such, there are fears that new home construction is only adding to the inventory of new homes, which could cause prices to stall. Mulraine pointed out this worrisome trend back in October. He reiterates this concern in a note today:

"New residential construction activity has been on a strong upswing, with the pace of housing starts surging to a new cycle high in December. While the rebound in building activity over the past year is largely consistent with the improved tone in housing market activity more generally, the 31% spike in construction since July appears to have gone slightly ahead of the market’s capacity to absorb it.

"In fact, with potential buyers continuing to be lured into the existing homes market where distressed properties have offered compelling bargains, the actual pace of new home sales has been disappointing, rising by only 14% over the same period."

This chart from TD Securities shows just why some experts are worried.