US: Housing Starts


Tue Oct 20 07:30:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Starts - Level - SAAR 1.147M 1.100M to 1.205M 1.206M 1.126M 1.132M
Permits - Level - SAAR 1.170M 1.150M to 1.211M 1.103M 1.170M 1.161M

Highlights
Starts, driven by a spike in multi-family units, came in much stronger than expected in September, news offset however by a significant decline in permits. Starts jumped 6.5 percent to a 1.206 million annual rate which is just outside Econoday's high estimate. Multi-family starts surged 18.3 percent to 466,000 which follows large spikes in related permits in May and June. Single-family starts rose very slightly, up 0.3 percent to 740,000.

But it's the permit side of the report that's weak, down 5.0 percent to only 1.103 million which is well below Econoday's low estimate. And it's the multi-family component that's especially weak, down 12.1 percent to 406,000 which is the lowest reading since March. Permits of single-family units are flat, down 0.3 percent to a 697,000 rate.

The West, a closely watched region for new homes, shows particular strength for starts with a monthly 25.4 percent surge and a 27.5 percent year-on-year gain. Starts have also been very strong in the South, which is the largest housing region, though permits here are lagging.

Taking the ups and downs all together, this report is probably in trend, pointing to an extended upward trend for construction though the abrupt downturn in permits does hint at slowing in the months ahead. Year-on-year, starts are up a very striking 17.5 percent with permits, however, up only 4.7 percent.

Market Consensus Before Announcement
Housing starts are expected to rise 2.0 percent in September to a 1.149 million annual rate after falling back a sharp 3.0 percent in August. Housing permits, in contrast, jumped 3.5 percent in August and for September are expected to come in unchanged. Permits for single-family homes, a leading indicator for the new home sector, are at their best levels since 2008. For starts, the key will be whether construction is picking up for multi-family homes where permits jumped during the spring.

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.