Housing starts are up 9.6 percent in August to 1.356 million units at a seasonally adjusted annual rate after an upward revision to 1.237 million units in July. The increase is above the consensus of 1.300 million units in the Econoday survey of forecasters. Starts are up 3.9 percent year-over-year in August. The jump in starts in August may be partially attributed to Hurricane Beryl in July which limited building activity in some regions. However, declines in mortgage interest rates have renewed builder confidence and willingness to engage in new construction.

Importantly, it is the single-family home sector which is supporting starts in August. Single-family units are up 15.8 percent to 992,000 units in August while the volatile multi-unit sector is down 4.2 percent to 364,000 units. This suggests that builders see demand returning in segments of the market that were less competitive when more existing housing units came on to the market, particularly for the entry level market.

Moderation in home prices has helped bring some buyers back into the housing market. More compelling may be that mortgage rates started to decline rapidly in early August when it was clear that the Fed was likely to cut rates when the FOMC meets September 17-18. The Freddie Mac rate for a 30-year fixed rate mortgage dropped from 6.73 percent in the August 1 data to 6.47 percent one week later and remained close to that throughout the month.

The number of permits issued in August shows that builders have projects in the pipeline to keep them busy. The number of permits issued are up 4.9 percent to 1.475 million in August after 1.406 million in July. The increase is above the consensus of 1.410 million units in the Econoday survey.

Permits for single family homes are up 2.8 percent to 967,000 in August after 941,000 in July, but down 0.5 percent from a year earlier. Despite the chilling effect of rising prices and relatively high mortgage rates, the demand for single family homes has not been much changed over the past year while housing stock for single-family units has been lean. Permits for multi-unit projects are up 9.2 percent in August to 508,000 from 465,000 in the prior month, but down 16.2 percent from August 2023. Demand for multi-unit housing can be volatile. The August increase is the highest in nearly a year and suggests that the decline in mortgage rates will make homebuying more attractive to renters and/or first-time buyers.

Housing starts in August are expected to rebound to a 1.300 million annual rate versus July's much lower-than-expected 1.238 million rate. Permits, at 1.396 million in July and which were also lower than expected, are seen rising to 1.410 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.