Starts of new homes are down 11.3 percent in August to a seasonally adjusted annual rate of 1.283 million units after a small downward revision to 1.447 million units. The August level is well below the consensus of 1.435 million units in the Econoday survey of forecasters. The level in August is the lowest since 1.266 million units in June 2020 during the first months of the pandemic and 1.245 million units in July 2019.

Starts are down 4.3 percent for single-family units to 941,000 in August, the lowest since 847,000 in April. Multi-unit starts are down 26.3 percent to 342,000 in August, the lowest since 304,000 in May 2020. Starts of single-family homes are less affected by the recent rise in mortgage rates to over 7 percent for 30-year fixed rate mortgages due to the shortage of existing units. Overall, homebuilders are seeing less buyer traffic and want to avoid building units that will sit empty.

However, permits issued are up 6.9 percent to 1.543 million units in August from 1.443 million units in July. This is above the consensus of 1.440 million units in the Econoday survey of forecasters. The level is the highest since 1.555 million units in October 2022. There may be some projects that have financing in place at a lower interest rate that are being brought forward to not lose the less expensive financing.

Permits are up 2.0 percent for single-family units to 949,000, the highest since 1.033 million units in May 2022. Multi-unit permits are up 15.8 percent to 594,000 units, matching 594,000 in May and the highest since 608,000 in March.

After rising from 1.398 million in June to 1.452 million in July, housing starts in August are expected to fall back to a 1.435 million annual rate. Permits, which held steady at 1.442 million in July, are expected at 1.440 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.