Starts of new homes are up 10.7 percent to 1.521 million units at a seasonally adjusted annual rate in February after an upward revision to 1.374 million units in January. The level is well above the consensus of 1.449 million units in the Econoday survey of forecasters. The February increase may be in part due to milder weather than seen in January, but it also reflects rising confidence among homebuilders that the recent dip in mortgage rates below 7 percent will help revive demand for new housing, especially while stocks of existing homes are lean. Compared to February 2023, starts were up 5.9 percent indicating that while the condition of the overall housing market is on the soft side due to borrowing costs and home prices, new construction is nevertheless active.

Starts of single-family homes are up 11.6 percent to 1.129 million units in February after 1.012 million units in January and are up 35.2 percent compared to a year ago. The February level is the highest since April 2022 when it was 1.176 million units. The volatile multi-unit sector sees starts up 8.3 percent in February to 392,000 units after 362,000 units in January, but down 34.8 percent from 601,000 units a year ago. Demand for multi-units has eased from activity in 2022 and early 2023 when there was a wave of renters seeking to buy at a time when monthly rental costs were escalating. For the past year, the market has shifted to building single-family homes to fill the gap in available inventories of homes to buy.

The number of permits issued are up 1.9 percent to 1.518 million units in February after an upward revision to 1.489 million units in January. The level is close to the consensus of 1.500 million units in the Econoday survey. Permits issued are keeping pace with starts and suggest an ongoing moderate pace of housing starts in the future, but no significant backlog in projects. The increase in permits issued is up 2.4 percent compared to 1.482 million in February 2023.

While permits issued for single-family homes are up only 1.0 percent to 1.031 million in February from 1.021 million in January, it jumps 29.5 percent when compared to 796,000 in February 2023. Permits issued for single-family homes are at the highest since 1.033 million in May 2022. In February, the number of permits issued for multi-unit projects is up 4.1 percent to 487,000 from 468,000 in January, but down 29.0 percent from 686,000 in February 2023.

Housing starts in February are expected to rebound sharply to a 1.449 million annualized rate versus January's 1.331 million that was lower than expected and held down in part by severe weather and also unusual strength in December. Permits, at 1.470 and 1.493 million the past two reports, are expected to rise to 1.500 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.