By Lucia Mutikani
WASHINGTON (Reuters) - U.S. housing starts plunged to their lowest level in a year in February likely as harsh weather kept building crews at home, in the latest indication that the economy hit a soft patch in the first quarter.
Bad weather, a strong dollar, weaker overseas growth and a now-settled labor dispute at West Coast ports have put a damper on economic activity in recent months, casting doubts on an anticipated June interest rate hike from the Federal Reserve.
Still, Fed officials, who started a two-day policy meeting on Tuesday, are expected to drop the phrase "patient" from their so-called forward guidance on interest rates.
"The winter was brutal. Of course, that makes the job of convincing the markets that it is time to start the return to normal interest rates more difficult," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
"But it shouldn't prevent the Fed from giving itself the flexibility to start when the time is right."
Groundbreaking tumbled 17 percent to a seasonally adjusted annual pace of 897,000 units, the lowest level since January 2014, the Commerce Department said on Tuesday.
Upward revisions to January's starts and a 3 percent increase in building permits last month suggested that February's decline was likely a temporary setback for housing. Permits have been above a 1 million-unit pace since July.
Economists had forecast groundbreaking at a 1.05 million-unit pace in February. Snowy and cold weather conditions gripped much of the country in the second half of February.
Groundbreaking plunged 56.5 percent in the Northeast to the lowest level since January 2009. Starts in the Midwest dropped 37 percent to a year low.
In the West, groundbreaking activity fell 18.2 percent. Starts in the South, where most of the home building takes place, slipped 2.5 percent.
"We find it reasonable to excuse the bad news in the February data because of the unusually cold weather during the month and think a weather-related rebound is likely in March," said Daniel Silver, an economist at JPMorgan (NYSE:JPM) in New York.
GROWTH ESTIMATES CUT
Barclays (LONDON:BARC) cut its first-quarter GDP growth estimate by two-tenths of a percentage point to a 1.3 percent annualized pace. Forecasting firm Macroeconomic Advisers lowered its estimate to a 1.5 percent rate from 1.6 percent. The economy grew at a 2.2 percent rate in the fourth quarter.
U.S. Treasury debt prices rose on the data, while the dollar slipped against a basket of currencies. Homebuilder shares fell, pushing the housing index down 0.55 percent, in line with a weaker stock market.
DR Horton (NYSE:DHI), the largest homebuilder, fell 0.23 percent, while Lennar Corp (NYSE:LEN) dipped 0.11 percent and Pulte Group fell 0.15 percent. Shares in KB Homes rose while Weyerhaeuser shares edged down.
With a rapidly tightening labor market expected to push up wage growth and encourage more young adults to move out of their parents' basements and set up their own homes, the outlook for residential construction is favorable.
Already in the fourth quarter, household formation was accelerating, breaking above the one-million mark that usually is associated with a fairly healthy housing market.
While a report on Monday showed an ebb in confidence among home builders in March, that was mostly because of lot and labor shortages. Builders overall remained optimistic of a solid housing recovery this year.
Last month, single-family homes groundbreaking, the largest part of the market, declined 14.9 percent to its lowest level since last June.
"Housing starts should climb again next month as the spring selling season begins. However, if sales fail to lift single-family permits this spring, it could spell trouble for the single-family market," said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts.
Groundbreaking for the multi-family homes segment dived 20.8 percent. Improving household formation and the lowest rental vacancies in more than two decades should boost multi-family starts this year.
Single-family permits fell 6.2 percent last month to a nine-month low. Multi-family permits surged 18.3 percent.
