Starts of new homes are up 1.9 percent in October to 1.372 million units at a seasonally adjusted annual rate, up from 1.346 million units in September and down 4.2 percent from a year ago. The October level is above the consensus of 1.350 million units in the Econoday survey of forecasters. Although higher mortgage rates have dampened momentum for new residential construction, it is better than might be expected with rates at 22-year highs. Builders are benefiting from a lack of supply in the existing housing market and to some extent from renters deciding that homeownership is affordable compared to the upward trend for rents.

Starts of single-family homes are up a scant 0.2 percent to 970,000 in October from 968,000 in September, but up 13.1 percent from October 2022. Builders are probably not starting pricier single-family units until they have a contract in place. Starts of multi-unit homes are up 6.3 percent in October to 402,000 after 378,000 in September, but down 30.0 percent from a year ago. It seems likely that something similar to the fall of 2022 is happening in 2023. In 2022 October and November saw increases in mortgage rates that drove homebuyers to less costly townhouses and condominiums. It looks like the recent upswing in rates is causing buyers to again think about smaller properties.

In October 2023, the Freddie Mac average rate for a 30-year fixed rate mortgage jumped to 7.65 percent from 7.20 percent in September and is the highest since late 2000. For November-to-date, the average has eased a bit to 7.57 percent.

Permits issued are up 1.1 percent to 1.487 million units after 1.471 million units in September and are down 4.4 percent from 1.555 million a year ago. Despite the softer housing market, the pace of permitting has not dropped as much as might be expected and should help support building activity in the coming months. Some of this may reflect the hurry to get permits issued for new construction which already had funding secured at a lower interest rate.

Permits for single-family homes are up 0.5 percent in October to 968,000 after 963,000 in September and is up 13.9 percent from a year earlier. Narrow supplies of homes available for sale particularly in the existing home market is keeping permitting for new construction higher. The number of permits in October is the highest since 1.033 million in June 2022. Permits for multi-unit construction are up 2.2 percent in October to 519,000 after 508,000 in September.

Housing starts in October are expected to hold steady at a 1.350 million annual rate versus September's 1.358 million rate that, though up sharply from August's 1.269 million, was nevertheless lower than expected. Permits, at 1.473 million in September, are expected to slow slightly to a 1.463 million rate.

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.