February housing starts are up 9.8 percent to 1.450 million units at an annual rate after an upward revision to 1.321 million units in January. Starts are down 18.4 percent year-over-year in February. The February level is well above the consensus of 1.315 million units in an Econoday survey. The February increase may be in part a story of mismatch in seasonal adjustment factors where there were more starts than usual for this time of year. However, it is probably more due to the recent declines in mortgage rates from the peaks seen in October and November 2022 which have improved home affordability as well as builders being more willing to negotiate on price.

There is an increase in starts of single-family homes of 1.1 percent in February to 830,000 after 821,000 in January. These are down 31.6 percent compared to a year ago. Starts of multi-units are up 24.0 percent in February to 620,000 from 500,000 in January, and up 9.9 percent compared to February 2022. While starts of multi-unit homes can be volatile, these have held up better in the overall picture of homebuilding since mortgage interest rates started their climb in mid-2022. Townhomes and condos are often a better entry point to homeownership for renters and first-time buyers being lower in price and with fewer maintenance items to worry about. With rents continuing to rise, those who can qualify for a mortgage are opting to fix their monthly housing costs.

Permits-issued in February are up 13.8 percent to 1.524 million units in February, the highest since 1.564 million units in September 2022 when mortgage rates neared the 7 percent mark. Compared to a year ago, permits are down 179 percent. The February level is well above the consensus of 1.340 million units in an Econoday survey. Some projects may be in the pipeline after taking advantage of lower interest rates in December and January and locking in financing costs.

Permits-issued for single-family units are up 7.6 percent in February to 777,000 after 722,000 in January, but down 35.5 percent from February 2022. Multi-unit permits are up 21.1 percent to 747,000 in February after 617,000 in January and up 14.4 percent from the year ago month. Multi-unit home construction is going to remain the mainstay of residential building activity in the near future as it has since the start of the housing slowdown in the second half of 2022.

Housing starts in January fell much sharper than expected, to a 1.309 million annualized rate from December's 1.371 million. February is expected to come in flat at 1.315 million. Permits, at 1.339 million in January, are also seen flat at 1.340 million.

Housing starts measure the initial construction of single-family and multi-family units on a monthly basis. Data on permits provide indications of future construction. 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.

Importance
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.

Interpretation
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.