US: Housing Starts

Wed Oct 18 07:30:00 CDT 2017

Consensus Consensus Range Actual Previous Revised
Starts - Level - SAAR 1.170M 1.150M to 1.210M 1.127M 1.180M 1.183M
Permits - Level - SAAR 1.238M 1.190M to 1.280M 1.215M 1.300M 1.272M

Single-family permits continue to rise in what, however, is the main positive in an otherwise weaker-than-expected housing starts and permits report. Looking first at headline totals, starts fell 4.7 percent in September to a 1.127 million annualized rate which is well under Econoday's low estimate. Permits fell 4.5 percent to a 1.215 million rate that is above the low estimate but below the consensus for 1.238 million. Hurricane effects aren't striking despite affected areas accounting for more than 1/4 of the total.

First the good news as permits for single-family homes rose 2.4 percent to an 819,000 rate and a year-on-year gain of 9.3 percent. Single-family homes are the backbone of the housing sector and strength here not only points to greater supply in the new home sales market but also to gains ahead for residential investment in the GDP report.

Not good news are permits for multi-family units which fell 16.1 percent to a 396,000 rate with this yearly rate at minus 24.0 percent. Multi-family units had shown strength earlier in the year but have since tailed off.

Starts for multi-family units fell 5.1 percent to a 298,000 rate with single-family starts down 4.6 percent to 829,000. Single-family completions offer some good news, up 4.6 percent to a 781,000 rate and adding immediate supply to the market.

Regional data do show what is likely hurricane-related weakness in the South, where starts fell 9.3 percent to 527,000 following August's 4.9 percent decline. Yet also weak were starts in the Midwest, down 20.2 percent to 154,000, and also the Northeast, down 9.2 percent at 119,000.

Housing has been generally slowing and looks to end 2017 no better than flat. Still, permits and completions for single-family homes are solid pluses.

Market Consensus Before Announcement
Housing starts in August showed some effects from Hurricane Harvey with weakness in the South pulling down the annualized rate to 1.180 million though further details did show general strength for the key single-family component against sharp weakness for multi-family units. Permits, where weather effects are marginal, rose sharply to a 1.272 million rate where however contributions from single-family and mulita-family units were turned around, with the former soft and the latter strong. The Econoday consensus for total housing starts in September is 1.170 million for what would be a small decline with permits at 1.238 million and a more sizable decline.

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.