US: Housing Starts

Fri Nov 17 07:30:00 CST 2017

Consensus Consensus Range Actual Previous Revised
Starts - Level - SAAR 1.190M 1.130M to 1.240M 1.290M 1.127M 1.135M
Permits - Level - SAAR 1.250M 1.210M to 1.260M 1.297M 1.215M 1.225M

Housing starts and permits posted unexpectedly strong gains in October, up 13.7 percent for starts to a 1.290 million annualized rate and up 5.9 percent for permits to 1.297 million. All readings show strength including single-family homes, up 5.3 percent for starts to an 877,000 rate and up 1.9 percent for permits to 839,000. Multi-family starts jumped 36.8 percent to 413,000 with permits up 13.9 percent to 458,000.

Completions are a special positive, up 12.6 percent overall to 1.232 million and adding immediate supply to a very thin new home market. This is the highest level of completions since February 2008. Homes under construction are also up, 0.9 percent higher to 1.096 million.

Housing started the year off strongly and stumbled through a weak spring season and a flat summer. The year-on-year rates, held down by multi-units, tell the story with total starts down 2.9 percent and permits up only 0.9 percent. But today's report does point to momentum for new home sales which surged to a 28-year high in the last report for September. Hurricane effects are limited in this report though starts in the South did swing lower in September and then swung back higher in October.

Market Consensus Before Announcement
A rise in single-family permits was the only positive from an otherwise weak housing starts & permits report for September. Starts in the month fell sharply to a 1.127 million annualized rate while permits, reflecting weakness for multi-family units that offset strength for single-family units, also fell sharply to 1.215 million. Hurricane effects in this report have been limited. The October consensus is for a 1.190 million rate for starts and 1.250 million for permits.

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.