Starts of new homes declined 4.3 percent to 1.460 million units at a seasonally adjusted annual rate in December from a downwardly revised 1.525 million in November, still holding up better than expected.

Starts of single-family homes dropped 8.6 percent to 1.027 million, although they were still up 15.8 percent from a year earlier. Multi-unit starts rose 7.5 percent to 417,000 in December but fell 9.5 percent year-over-year. Regionally, total housing starts fell 16.9 percent in the Northeast, 8.8 percent in the Midwest and 5.1 percent in the South, while they increased 4.7 percent in the West.

Permits, by contrast, rose 1.9 percent to 1.495 million from 1.467 million, above Econoday's consensus. Permits increased 6.1 percent year-over-year.

Single-family home permits were up 1.7 percent on the month and multi-family unit projects up 1.4 percent. Total permits issued in December rose 20.2 percent in the Northeast, 4.7 percent in the Midwest, 8.4 percent in the South, while they fell 16.3 percent in the West.

These results are better than expected and, together with the surprising drop in jobless claims also released this morning, support the US's Relative Performance Index which stands at 20 to indicate that recent data on net are coming in safely over consensus forecasts. The longer this trend continues, the less urgency the Federal Reserve will feel to cut interest rates.

Despite scarcity of single-family homes on the market, housing starts in December are expected to fall back sharply to a 1.425 million annual rate versus November's rate of 1.56 million that was much better than expected. Permits, at a lower-than-expected 1.46 million in November, are expected to rise to 1.478 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.