US: Housing Starts


Tue May 19 07:30:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Starts - Level - SAAR 1.029M 0.970M to 1.120M 1.135M 0.926M 0.944M
Permits - Level - SAAR 1.070M 1.050M to 1.120M 1.143M 1.039M 1.038M

Highlights
There were hardly any indications before today, but the spring housing surge is here. Today's housing starts & permits report is one of the very strongest on record and with starts soaring 20.2 percent in April to a much higher-than-expected annual rate of 1.135 million and with permits up 10.1 percent to a much higher-than-expected 1.143 million. Both readings easily top the Econoday high-end forecast of 1.120 million for each. The gain for starts is the best in 7-1/2 years with the gain in permits the best in 7 years.

Strength in starts is split between single-family, up 16.7 percent to 0.733 million, and multi-family, up 27.2 percent to 0.402 million. Single-family starts are up a very convincing 14.7 percent year-on-year with multi-family up only 0.5 percent.

Strength in permits is centered in multi-family units, up 20.5 percent to a 0.477 million rate and underscoring the importance of renters in the housing sector. Permits for single-family homes rose a less spectacular but still very solid 3.7 percent to 0.666 million. Year-on-year, single-family permits still lead at plus 7.1 percent vs plus 5.5 percent for multi-family permits.

Regional data show special strength for starts and permits in the Northeast followed by the West. Readings on the Midwest and South, though a bit mixed, are also strong.

Today's report is an eye-opener and will re-establish expectations for building strength in housing, a sector held down badly in the first quarter by severe weather. Note that today's report includes annual revisions including a net 10,000 upward revision to March and February (now 0.944 million and 0.900 million).

Market Consensus Before Announcement
Housing starts & permits have been some of the most disappointing data on the calendar, underscoring how weak the new home market really is. Excuses were abundant during the heavy weather of the first quarter but those excuses won't apply to the latest report which is for April. Both starts and permits are expected to show big gains from depressed levels.

Definition
A housing start is registered at the start of construction of a new building intended primarily as a residential building. The start of construction is defined as the beginning of excavation of the foundation for the building.



Description
Two words...Ripple Effect. This narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as housing starts, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Home builders usually don't start a house unless they are fairly confident it will sell upon or before its completion. Changes in the rate of housing starts tell us a lot about demand for homes and the outlook for the construction industry. Furthermore, each time a new home is started, construction employment rises, and income will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and a myriad of consumption opportunities for the buyer. Refrigerators, washers and dryers, furniture, and landscaping are just a few things new home buyers might spend money on, so the economic "ripple effect" can be substantial especially when you think of it in terms of more than a hundred thousand new households around the country doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, housing starts have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the housing starts data carry valuable clues for the stocks of home builders, mortgage lenders, and home furnishings companies. Commodity prices such as lumber are also very sensitive to housing industry trends.

Importance
The housing starts report is the most closely followed report on the housing sector. Housing starts reflect the commitment of builders to new construction activity. Purchases of household furnishings and appliances quickly follow.

Interpretation
The bond market will rally when housing starts decrease, but bond prices will fall when housing starts post healthy gains. A strong housing market is bullish for the stock market because the ripple effect of housing to consumer durable purchases spurs corporate profits. In turn, low interest rates encourage housing construction.

The level as well as changes in housing starts reveals residential construction trends. Housing starts are subject to substantial monthly volatility, especially during winter months. It takes several months to establish a trend. Thus, it is useful to look at a 5-month moving average (centered) of housing starts.

It is useful to examine the trends in construction activity for single homes and multi-family units separately because they can deviate significantly. Single-family home-building is larger and less volatile than multi-family construction. It is more sensitive to interest rate changes and less speculative in nature. The construction of multi-family units can be substantially influenced by changes in the tax code and speculative real estate investors.

Housing construction varies by region as well. The regions of the United States do not all follow exactly the same economic patterns because industry concentration varies in the four major regions of the country. The regional dispersion can mask underlying trends. The total level of housing construction as well as the regional distribution of housing construction is important.

Housing permits are released together with housing starts every month and are considered a leading indicator of starts. In reality, housing permits and starts typically move in tandem each month. However, there are some exceptions. For instance, if permits are issued late in the month, and weather does not permit immediate excavation, then permits might lead starts. For the most part, though, permits are not a good predictor of future housing starts. Incidentally, housing permits (but not starts) are one of the ten components of the index of leading indicators compiled by The Conference Board.