US: Housing Starts

Tue Dec 19 07:30:00 CST 2017

Consensus Consensus Range Actual Previous Revised
Starts - Level - SAAR 1.240M 1.191M to 1.290M 1.297M 1.290M 1.256M
Permits - Level - SAAR 1.270M 1.250M to 1.310M 1.298M 1.297M 1.316M

A pivot higher is underway in the new home market. The latest evidence comes from housing starts and permits which matched their unusual October strength with stronger-than-expected results for November. Starts rose 3.3 percent to a 1.297 million annualized rate and though permits fell 1.4 percent to 1.298 million, they show a 1.4 percent gain for the key single-family category to a 862,000 rate. And starts for single-family homes, up 5.3 percent to 930,000, are the highest of the expansion, since 2007.

Total completions fell 6.1 percent to a 1.116 million rate which is bad news for supply where thin conditions have held back sales. But homes under construction rose, up 1.0 percent to 1.110 million. Regional data show start strength in the West and South where permits were also strong in possible evidence of a hurricane reversal.

New home sales shot higher in September and data from the sector haven't slowed down since in what looks to be a major positive for the fourth-quarter economy.

Market Consensus Before Announcement
Housing starts and permits had been flat most of the year but they did accelerate sharply in October, up 13.7 percent for starts to a 1.290 million annualized rate and up 7.4 percent for permits to 1.316 million (1.297 million initially reported). October's highlights included starts for single-family homes, up 5.3 percent to an 877,000 rate, and permits for multi-family homes which rose 15.9 percent to 466,000. Forecasters see give back in November with the consensus for starts at 1.240 million and permits at 1.270 million.

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.