Implications:  After posting the best year in a decade in 2017, housing starts surprised to the upside in January, beating even the most optimistic forecast by any economics group.  Starts rose 9.7% in January to a 1.326 million annual rate, the second fastest post-recession pace.  It is important to note that while single-family starts did rise in January, 74% of the month's gain was due to the volatile multi-unit sector.  But, looking past monthly volatility, single-family starts are still the main driver of trend growth, as the chart to the right shows.  The horizon also looks bright for future activity, with permits for new construction, the number of units authorized but not started, and units currently being built all sitting at post-recession highs.  Notably, this has all happened despite a significant uptick in mortgage rates in the past year, which some analysts claimed would derail the housing recovery.  Based on population growth and "scrappage," housing starts should eventually rise to about 1.5 million units per year.  And the longer this process takes, the more room the housing market will have to eventually overshoot the 1.5 million mark.  Although tax reform trimmed the principal limit against which borrowers can take a mortgage interest deduction to $750,000 versus the current law amount of $1 million, the law only affects new mortgages.  In addition, large reductions to marginal tax rates in the early 1980s, which reduced the value of the mortgage interest deduction, coincided with a rebound in housing.  In other words, we don't expect the changes in the deduction to cause problems for the housing industry at the national level, although we do expect some shift in building toward regions with lower taxes and land prices.  In other recent housing news, the NAHB index, which measures homebuilder sentiment, remained unchanged at 72 in February, a historically elevated level signaling strong optimism from developers.  On the inflation front, import prices jumped 1% in January while export prices rose 0.8%.  In the past year, import prices are up 3.6% while export prices have increased 3.4%, reinforcing other recent data showing a rising trend in inflation.

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