HOUSING STARTS

Definition

Housing starts measure the number of residential units on which construction is begun each month.

Importance

Housing starts reflect the commitment of builders to new construction activity. Purchases of household furnishings and appliances quickly follow.

Why do Investors 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.

Homebuilders 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 homebuilder 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 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 homebuilders, mortgage lenders, and home furnishings companies. Commodity prices such as lumber are also very sensitive to housing industry trends.

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 reveal residential construction trends. Housing starts are subject to substantial monthly volatility, especially during winter months. Following either the three-month moving averages of the monthly levels or year-over-year percent changes will smooth out monthly volatility and provide a more accurate picture of the underlying trend.

Frequency
Monthly.

Source
Bureau of the Census, U.S. Department of Commerce.

Availability
Usually during the third week of the month

Coverage
Data are for the previous month. (Data for June are released in July.)

Revisions
Monthly, data for the prior two months are revised to incorporate more complete information. These revisions affect at least three years of data. The magnitude of the revisions is typically small.