Consensus Notes Housing starts in September rose 0.5 percent, following a revised 1.0 percent decline in August. But the September pace of 0.590 million units was below initial August estimate of 0.598 million units. The September pace of overall starts was down 28.2 percent year-on-year. Housing permits point toward a pause or temporary leveling in the housing recovery, slipping 1.2 percent, following a 2.8 percent rise in August. Permits in the latest month stood at an annualized 0.573 million units and were down 28.9 percent on a year-ago basis.
Highlights
Housing activity unexpectedly fell back in October, calling into question the strength of housing recovery. Housing starts in October dropped 10.6 percent, following a revised 1.9 percent gain the month before. October's 0.529 million unit pace of new home groundbreaking came in much lower than the consensus forecast for 0.600 million unit and was down 30.7 percent on a year-ago basis. The decline was led by a 34.6 percent plunge in multifamily starts but the single-family component also slipped-by 6.8 percent.
By region, the October drop in starts was led by an 18.8 percent fall in the Northeast. Other Census regions also declined: the Midwest, down 10.6 percent; the South, down 9.6; and the West, down 8.5 percent.
Homebuilders appear to be cautious about upcoming new home sales as housing permits in October dropped 4.0 percent after dipping 0.9 percent the month before. October's pace of 0.552 million units annualized was down 24.3 percent on a year-ago basis.
October's starts numbers were disappointing and likely reflect concern by homebuilders about the housing market once the first-time homebuyer tax credit was expected to expire at the end of November. That credit has been extended and expanded and we may see some pickup in coming months in the single-family component. Weakness in the multifamily component will still be affected by high vacancy rates but this component is volatile.
On the release, equity futures slipped as Treasury yields mostly firmed (but as a result of higher CPI inflation announced at the same time).
Definition 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.
Why Investor's Care 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 don't 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.
Frequency Monthly.
Source U.S. Census Bureau, U.S. Department of Commerce and U.S. Department of Housing & Urban Development.
Availability Usually during the third week of the month.
Coverage Data are for the previous month. Data for June are released in July.