US: Housing Starts

Thu Sep 17 07:30:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Starts - Level - SAAR 1.168M 1.100M to 1.230M 1.126M 1.206M 1.161M
Permits - Level - SAAR 1.160M 1.100M to 1.235M 1.170M 1.119M 1.130M

Housing starts fell back in August but not permits which gained and point to strength for starts ahead. Starts fell 3.0 percent in the month to a lower-than-expected 1.126 million annual pace while permits rose 3.5 percent to a higher-than-expected 1.170 million. Starts for single-family homes, like the headline for starts, also fell 3.0 percent in August but follow a 10.9 percent surge in July. Permits for single-family homes rose 2.8 percent in the latest month to 699,000 which is the highest since 2008.

Housing under construction is also at a 2008 high, at 920,000 vs 908,000 in July. But completions were down in the month, from July's 966,000 pace to a still healthy 935,000.

By region, starts data show increasing strength for the South which is by far the largest region, up 7.1 percent in the month. Permits in the South rose 2.4 percent for a 10 percent year-on-year gain. Permits in the West are the strongest of any region, up 9.6 percent in the month for a year-on-year rate surge of 36 percent.

Revisions to July were mixed with starts revised lower but permits higher. On net, this report is another positive for housing which is proving to be a key sector for the 2015 economy.

Market Consensus Before Announcement
Housing starts are expected to dip 3.2 percent in August to a 1.168 million annual rate, reflecting a prior dip for permits. But housing permits are expected to rise 3.7 percent to a 1.160 million rate, reversing a plunge in July that was skewed by a change in New York City real estate law. A drop in starts and a rise in permits could lower expectations for third quarter housing while raising expectations for the fourth quarter.

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.