Starts of new homes are down 6.8 percent in July to 1.238 million units at a seasonally adjusted annual rate after a downward revision to 1.329 million units in June. Starts are down 16.0 percent compared to July 2023. The July level is below the consensus of 1.342 million units in the Econoday survey of forecasters. The July level is the lowest since 931,000 in April 2020. It likely reflects impacts from Hurricane Beryl preventing some starts and also increased caution on the part of homebuilders at a time when homebuyers were anticipating lower mortgage rates and therefore staying out of the housing market.

The decline in July is entirely due to a fall of 14.1 percent in single-family home starts to 851,000 after 991,000 in July. Single-family home starts are down 14.8 percent compared to a year ago. July single-family starts are the lowest since 822,000 in March 2023. Starts of multi-unit homes are up 14.5 percent compared to in July to 387,000 from 338,000 in the prior month. However, multi-unit starts are down 18.4 percent from a year ago.

The composition of starts in part is an affordability issue. Prices for homes remain elevated which makes getting a favorable mortgage rate a determining factor for homebuyers. In July, demand for new single-family homes saw some effect from mortgage rates remaining relatively high, if just below 7 percent. Some homebuyers may have turned to the less expensive multi-unit segment of the market. In any case, the significant drop in mortgage rates in early August and rebound after Hurricane Beryl will probably result in a rebound in starts in the next month's report.

The number of permits issued in July is down 4.0 percent to 1.396 million units after a small upward revision to 1.454 million units in June. Permits issued are down 7.0 percent compared to a year ago. The July level is below the consensus of 1.430 million in the Econoday survey, but not materially so given the weather impacts and outlook for mortgage rates.

Permits issued for single-family homes are essentially unchanged at down 0.1 percent in July to 938,000 after 939,000 in June and down only 1.6 percent from a year ago. There is still underlying demand for new single-family homes behind the month-to-month fluctuations. Permits issued for multi-unit properties are down 11.1 percent in July to 458,000 after 515,000 in June, and down 16.4 percent compared to July 2023. Volatility in the multi-unit sector is not unusual and levels have fallen significantly from 2022 when renters were taking advantage of lower mortgage rates at a time when rents were rising quickly. It is possible that with mortgage rates below 6.5 percent for a 30-year fixed rate mortgage according to Freddie Mac, some renters will take a fresh look at the advantages of homeownership.

Housing starts in July are expected to slow slightly to a 1.342 million annual rate versus June's higher-than-expected 1.353 million rate. Permits, at 1.446 million in June and which were also higher than expected, are seen slowing to a 1.430 million rate. June's results benefited from strong demand for multi-unit structures.

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.