Do Not Be Fooled by U.S. Housing Numbers in January

It is now official. January 2006 was the warmest January since at least 1895, the starting date for the NOAA National Climatic Data Center's historical temperature series. All 48 states in the contiguous United States recorded warmer-normal-temperatures in January. Fifteen states recorded record highs and an additional 26 states had temperatures "much above average." The temperature nationally averaged 39.5°F, or 8.5°F above normal.

When the weather warms up in January, the coldest month of the year, the ground softens, making it easier to pour concrete. More houses, thus, get started. It is also easier to sell a house. Buyers can more easily visualize the house of their dreams when it is sunny and warm, than when the house is covered in snow. Open houses tend to be larger.

Therefore, January should turn to be a good month for the housing market. Early evidence is showing this to be the case. Nearly a quarter of the 193,000 jobs created in January were construction jobs. Mortgage applications were also up in January (although much of the strength came from refinancing, as borrowers switched from variable to fixed mortgage rates).

How much of a boost will the weather give housing? Because the weather held starts down in December—it rained a lot in the West and was colder than normal in the Southeast—and because January was so warm, housing starts may increase more than 10%. The kick to home sales might also be substantial. However strong the numbers turn out to be, do not be misled by them. The good weather means that houses that would have been started or sold in February or March were instead started or sold in January. The housing market will continue to slow, no matter how strong January's numbers turn out to be.

January's good weather will affect other statistics, making it more difficult to take the economy's pulse. The malls and auto dealerships will be more crowded than they would have been otherwise. The NOAA's Residential Energy Demand Temperature Index recorded its lowest value ever for January, so energy consumption (and imports) will be lower. Indeed, the NOAA estimates that residential energy demand was 20% below what it normally would be in January.

Why was January so warm? According to the NOAA, "The jet stream remained unusually far to the north during January 2006, trapping cold air in Canada and Alaska, while allowing relatively warm Pacific air to influence the temperatures across the contiguous U.S. This led to the nationally warm conditions." The jet stream has since moved back to where it normally is during winter, and the NOAA says that "The February outlook calls for below-normal temperatures in the mid-Atlantic, the Southeast, and the inter-mountain West, and above-normal temperatures in the Southwest, the northern Plains, and Alaska."

The NOAA also announced recently "the official return of La Nina." La Nina, which occurs every 3-5 years, refers to a cooling of the waters in the Pacific Ocean near the equator. It is associated with increased hurricane activity. The NOAA is calling this a mild La Nina episode, and expects it to remain into late spring, and possibly the summer.