The Drought's Latest Victim Out West Is the Housing Market

The drought out West isn't just evident in parched front lawns. It's also starting to infiltrate housing data, according to the chief economist of a homebuilders' group.

Housing starts in the West fell for a third straight month, dropping by 19% in March to an annualized rate of 201,000 for the weakest since May. Construction rebounded from harsh winter weather in other parts of the country, such as the Northeast, where they jumped a record 115%, and the Midwest.

The weakness in the West might reflect the record-setting drought, which may be discouraging companies from building or taking out permits for new construction, said David Crowe, chief economist at the National Association of Home Builders in Washington. Uncertainty surrounding local water policy and the ability to obtain water connections for new homes or apartment buildings could be holding some builders back, he said.

"Until it's clear what restrictions mean for new building, it's wise for builders to be hesitant," Crowe said. "This is more serious than just a temporary dry period. This is a new regime that says it's going to be harder to obtain additional water usage."

About 21% of the contiguous U.S. fell in the "moderate" to "extreme" drought categories at the end of March, according to the Palmer Drought Index, which dates back to the beginning of the 20th century. States such as California, Nevada and Wyoming were experiencing extreme drought in some or all of their boundaries last month, according to the National Climatic Data Center.

In the most populous U.S. state, Gov. Jerry Brown ordered California's first mandatory water restrictions, seeking a 25% drop in use and a requirement that new homes feature water-efficient irrigation if the builder plans to use potable water for landscaping.

Still, it's hard to blame the drought alone for weak housing data.

Many homebuilders already face strict construction codes that limit water use, such as requiring low-flow showers, faucets and toilets, suggesting they should be able to adapt to more stringent requirements. The supply of viable land is also still tight across the U.S. and especially in places such as California, further restricting the pace of construction.

More broadly, housing still has a lot of things working in its favor, from improved job growth to faster household formation and historically low mortgage rates. 

"When it comes to new-home construction, the stage is set for strength in the second quarter," Patrick Newport and Stephanie Karol, U.S. economists at IHS Global Insight, wrote in a note to clients.