US: Housing Starts

Tue Aug 18 07:30:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Starts - Level - SAAR 1.180M 1.060M to 1.280M 1.206M 1.174M 1.204M
Permits - Level - SAAR 1.230M 1.140M to 1.350M 1.119M 1.343M 1.337M

Building permits slid sharply in July but reflect in part a plunge in the Northeast where a change in New York City real estate law pulled permits into June at the expense of July. Permits fell 16 percent in July to a 1.119 million annual rate with the Northeast down 60 percent. But permits also fell in the other three regions including a steep 9.9 percent decline in the West. Turning now to starts, they inched 0.2 percent higher to a 1.206 million rate. But the decline in permits, though skewed by the Northeast, points to less strength than expected for the new home market in the months ahead.

A relative positive in the report is less weakness in permits for single-family homes which fell only 1.9 percent. Permits for multi-family homes, which are smaller in size and provide less of a boost to GDP, fell 32 percent. Housing completions came in at a 987,000 pace in the month, up 2.4 percent from June in a positive start for the third quarter.

In sum, this report is on the soft side and doesn't increase the chances for a September rate hike from the Fed. Initial reaction in the markets is mixed with the resilience in starts offering some offset to the plunge in permits.

Market Consensus Before Announcement
Strength for rental units has been driving housing starts & permits sharply higher this year with strength for single-family homes much less pronounced. Forecasters see another rise for starts, up 0.5 percent to a 1.180 million annual rate, but a very sharp 8.4 percent reversal to 1.230 million for permits where the year-on-year rate was up 30 percent in June.

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.