US: Housing Starts

Fri Jul 17 07:30:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Starts - Level - SAAR 1.125M 1.085M to 1.200M 1.174M 1.036M 1.069M
Permits - Level - SAAR 1.178M 1.070M to 1.265M 1.343M 1.275M 1.250M

Strong demand for apartment units drove housing starts & permits data far beyond expectations, overshadowing less strength for the key single-family home category. Starts came in near the top of expectations, up 9.8 percent in June at a 1.174 million annual rate, but reflect a 29.4 percent surge in the multi-family component. The single-family component actually fell 0.9 percent. The same pattern appears for permits which jumped 7.4 percent overall to a much higher-than-expected 1.343 million rate but here too multi-family units rose 15.3 percent with single-family up far less but at a still very strong 0.9 percent.

Regional data, where the separation between single-family homes and multi-family units is not broken out, show special strength for the South which is by far the largest region for housing. Starts in the South rose 13.5 percent in June with permits up 10.4 percent. Permits in the West are also strong, up 9.5 percent, though starts in the region fell 6.0 percent. Also of note is an outsized 35.5 percent surge in Northeast starts.

The unusual rise for multi-family units reflects high levels of rent, evident in today's CPI report. The single-family component is less strong though the 0.9 percent rise in permits does point to strong second-half activity for the new home sector. This report is very solid but just not as spectacular as the headlines suggest.

Market Consensus Before Announcement
Housing starts and permits have been volatile and strong in recent months and are expected to remain so in June, with an expected 8.6 percent monthly gain in starts to 1.125 million but a 7.6 percent decline for permits to 1.178 million. Even with such a mix, both readings would point to solid health for residential construction.

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.

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.

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.

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.