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Housing starts fell 1.4% from November to December, reaching a total of 1.38 million units, down 21.8% from December 2021. As the housing market continued to cool at an accelerated rate during the final month of the year, building permits followed a similar trajectory, dropping 1.6% on a monthly basis in November and 29.9% year-over-year, according to Zillow.

Though falling inflation has lowered building costs, surging mortgage rates are causing a major slowdown in homebuying activity, forcing builders to pump the brakes on new projects until housing affordability improves.

Builders continued to pump the brakes on building new homes amid a cooling housing market, with housing starts down further in December and permit activity following a somewhat similar path. An estimated 1.55 million housing units were started in 2022, down 3% from the 2021 figure.

Historically housing starts have been an early warning sign of an oncoming recession. And while recession risk has increased, the worst economic predictions for 2023 could still be avoided. This is partly because the labor market is still performing well and a slew of other incoming economic data points to falling inflation.

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