US: Housing Starts

Tue Sep 19 07:30:00 CDT 2017

Consensus Consensus Range Actual Previous Revised
Starts - Level - SAAR 1.173M 1.130M to 1.225M 1.180M 1.155M 1.190M
Permits - Level - SAAR 1.220M 1.200M to 1.250M 1.300M 1.223M 1.230M

In a mostly solid report that includes some effects from Hurricane Harvey, housing starts came in slightly higher than expected at a 1.180 million annualized rate. Starts in the South fell 7.9 percent in part reflecting Harvey's impact on Texas. Single-family starts are a major positive in the report, up 1.6 million to an 851,000 rate and offsetting a 6.5 percent decline for multi-family units to a 329,000 rate.

Turning to the other side of the report, permits came in decidedly stronger than expected at a 1.300 million rate and do not include any significant effects from Harvey. But strength in permits is confined to multi-family homes which surged 19.6 percent to a 500,000 rate with single-family permits the only real negative in today's report, down 1.5 percent to 800,000.

Revisions are positive with July starts upgraded to 1.190 from 1.155 million and July permits now at 1.230 vs an initial 1.223 million. Completions are another area affected by Harvey, falling 10.2 percent to 1.075 million with the South down 22.2 percent to a 491,000 rate.

Hurricane Irma will dominate the next report and its effects on Florida. But pending this impact and with two months in, the third quarter is outpacing the second quarter in both starts and permits. Overall, today's numbers are positive for a housing sector that is having trouble building momentum into year end.

Market Consensus Before Announcement
Housing starts and permits have proven unexpectedly soft in 3 of the last 4 reports and have been dimming the chances for a strong finish to this year's housing sector, even before hurricane effects are considered. Cooling in multi-family starts and permits has been behind the weakness with resilience in single-family homes, despite give back in July, an underlining positive. Econoday forecasters are calling for an August rise in housing starts to a 1.173 million annualized rate vs July's 1.155 million. Housing permits are seen slipping slightly to a 1.220 million rate vs 1.223 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.