US: Housing Starts

Wed May 16 07:30:00 CDT 2018

Consensus Consensus Range Actual Previous Revised
Starts - Level - SAAR 1.324M 1.260M to 1.350M 1.287M 1.319M 1.336M
Permits - Level - SAAR 1.350M 1.325M to 1.370M 1.352M 1.354M 1.377M

Despite headline declines, the housing starts and permits report for April is mostly positive. First the negatives: starts fell 3.7 percent in the month to a lower-than-expected 1.287 million annualized rate while permits fell 1.8 percent to an as-expected 1.352 million rate. The decline for both starts and permits reflects give back from multi-units which fell sharply in April after rising sharply in March.

Steady readings for single-family homes are the positives in today's data. Starts here posted a 0.1 percent increase to an 894,000 rate while single-family permits, which are the best news in the report, rose 0.9 percent to an 859,000 rate. But not all the single-family news is positive as completions fell 4.0 percent in the month to an 820,000 rate for a decline that is not welcome in a housing market starved of supply.

But behind all the volatility in the numbers is a housing sector that continues to climb at a solid rate, reflected in year-on-year change that shows total starts up 10.5 percent and permits up 7.7 percent.

Market Consensus Before Announcement
Slight step backs are the expectations for both housing starts and permits which, boosted by a turn higher for multi-unit activity, rose very sharply in March. April's consensus for starts is a 1.324 million annualized rate vs March's 1.319 million with permits seen at 1.350 vs 1.379 million (revised from an initial 1.354 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.