The drop in residential construction follows a drop in December, when housing starts also fell 3.4 per cent.

The decline exceeded Wall Street's expectations.

Economists surveyed by the Wall Street Journal expected housing starts to fall to 1.35 million from a preliminary estimate of 1.38 million in December.

Construction is at its lowest level since June 2020, in the depths of the coronavirus pandemic. Starts have also fallen for the fifth month in a row.

The annual rate of total housing starts fell from 27.3% in the previous year.

In December, housing starts were revised down by 3.4 per cent to 1.37 million units, compared to a 1.4 per cent decline previously.

In January, new home building permits rose 0.1 per cent to 1.34 million.

Economists had expected building permits to rise to 1.35 million from a preliminary estimate of 1.34 million in December.

Key details. On an unadjusted basis, housing starts fell by 1% in January.

The rate of construction of single-family homes fell by 4.3 per cent in January and condominiums fell by 5.4 per cent.

Permits for single-family homes fell 1.8 per cent in January, while permits for buildings with at least five units rose by 0.5 per cent.

Notably, permits for medium housing, or buildings with two to four housing units, such as townhouses, rose by 26.1 per cent.

Regionally, the South and West saw the greatest increase in housing construction.

Single-family home construction in the South led the jump with an 11.6 per cent increase. The Northeast and West regions reported a decline in single-family home construction.

The general trend. The housing starts data may reflect the sluggish sentiment of builders back in January when they were only slowly gaining confidence in buyers returning.

Since then, builders have become more confident that new home sales will increase and have indicated that they will ramp up production in the coming months.

Abbey Omodunbi, senior economist at PNC, wrote in a note that the strong economic data (retail sales and jobs report) in January means that the Federal Reserve may raise the federal funds rate higher than previously expected to keep inflation in check.

And This will put upward pressure on mortgage rates, slowing housing demand further this year, he added.

The firm expects house prices to fall by 12 per cent in 2023.

"Homebuilders continue to face a string of headwinds, including a shortage of workers and waning demand for housing," Priscilla Thiagamoorthy, senior economist at BMO Economics, wrote in a note." And, with interest rates likely to remain high for some time, homebuilders are not out of the woods yet."