|Starts - Level - SAAR||1.162M||1.125M to 1.200M||1.060M||1.206M||1.191M|
|Permits - Level - SAAR||1.150M||1.125M to 1.220M||1.150M||1.103M||1.105M|
Pulled down by a big drop in multi-family homes, housing starts fell a steep 11.0 percent in October to a 1.060 million annualized rate that is far below Econoday's low estimate. Starts for multi-family homes, which spiked in September following a springtime jump in permits for this component, fell back 25 percent in the month to a 338,000 annualized rate. Single-family starts fell a much less severe 2.4 percent to 722,000.
And there is important good news in this report. Permits are up, rising 4.1 percent to a 1.150 million rate that hits the Econoday consensus. Single-family permits are up 2.4 percent to a 711,000 rate with multi-family up 6.8 percent to 439,000.
Housing completions fell back in October, down 6 percent to a 965,000 rate that reflects lower work in the Northeast and Midwest. Homes under construction rose 0.9 percent to a recovery best 938,000 rate and are up a very strong 16.4 percent year-on-year, pointing, despite the slip in starts, to ongoing strength for construction spending, at least for October.
But the big drop in starts is definitely a negative for the near-term construction outlook, though the rise in permits points to subsequent strength.
Market Consensus Before Announcement
Multi-family units drove starts higher in the prior report though single-family starts also showed some strength. But housing starts for October, reflecting prior weakness in permits, are expected to fall 1.2 percent to a 1.162 million annualized rate. Housing permits, however, are expected to bounce back 1.1 percent to a 1.150 million rate. Ups and downs aside, this report has been mostly solid and has been signaling continued strength in construction spending.
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.