Starts of new homes are down 14.8 percent to 1.331 million units in January at a seasonally adjusted annual rate after a substantial upward revision to 1.562 million units in December. The January level is well below the consensus of 1.470 million units in the Econoday survey of forecasters. Starts are down 0.7 percent compared to a year ago. The January decrease is probably due to two factors. First, there was intense cold weather in many parts of the country that would have delayed construction activity. Second, homebuilders apparently undertook more starts in late 2023 when the weather was relatively mild and there were signs that mortgage rates were coming down. Limited supplies of existing homes are keeping demand up for new homes.

The January headline also reflects weakness in multi-unit starts which are down 35.6 percent in January to 327,000 after 508,000 in December and are down 36.8 percent from 517,000 in January 2023. Builders have stepped up construction of single-family homes over the past year. In January, starts of single-family homes are down 4.7 percent to 1.004 million units after 1.054 million units in December, but are up 22.0 percent from 823,000 units in January 2023. Multi-unit building can be volatile and January suggests that the larger single-family sector is not doing too badly in recent months.

The number of permits issued in January are down 1.5 percent to 1.470 million from 1.493 million in December, but are up 8.6 percent compared to a year ago. The January level is below the consensus of 1.510 million in the Econoday survey. However, the decline is entirely due to a 7.9 percent decrease in permits for multi-unit building to 455,000 in January from 494,000 in December, and is down 24.9 percent from 606,000 in January 2023. Permits for single-family homes are up 1.6 percent to 1.015 million units in January from 999,000 in December, and up 35.7 percent from 748,000 a year ago. The January single-family permits are the highest since 1.033 million in June 2022. This suggests that builders have plenty of projects planned and will stay active in the coming months.

Housing starts in January are expected to hold mostly steady at a 1.470 million annual rate versus December's 1.460 million that beat the consensus but nevertheless was down from the prior month's jump to 1.525 million. Permits, at 1.495 million in December and were also better than expected, are expected to rise to 1.510 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.