13) Economic Indicators: Housing Starts

by · October 16, 2010

What It Is

“Housing starts” is a term commonly used by Wall Street. However, it’s formal name is New Residential Construction Report. It covers a number of important data, which you will learn later. It is prepared by two agencies: U.S. Census Bureau and HUD or U.S. Department of Housing and Urban Development. The report is issued monthly, usually on the seventeenth of the month.

Basic Information

Three factors are considered in the report: the number of house started, the number of building permits issued, and the number of houses that have been completed. As its name suggests, housing starts refer to the actual laying of foundation of a house. The building permits metrics, on the other hand, count only those that have already been granted.

The data is also subdivided according to the different regions in the United States: South, West, Northeast, and Midwest. This is due to the significant differences in the real estate industries in each of these regions. The housing starts also subdivide properties into different types, i.e. from single-family homes to multiple units.

The statistics cover both yearly and monthly changes. The percentage changes reflect the highs and lows during the previous month and over a period of years.

The report will also show you the effect of the actions of the Federal Reserve on the market. When the interest rate is high, you can see the demand for homes decreases. After all, the rise of interest leads to higher interest rates on mortgages, leading in turn to higher payments. However, it starts to go up during the early stages of any business cycle. Thus, you can easily determine the pivot points of the business cycle.

You can read more information at Investing in Real Estate.

How the Report Is Valuable

The information found in the housing starts report can be correlated to other leading indicators and the U.S. Leading Index. It can also be used by the Federal Market Committee or FOMC, especially when they are making their guidelines and policies.

It is also related to Consumer Price Index, especially if you factor in existing home sales. As more people buy homes, the consumer sales go up. Home owners would buy furniture, furnishing, and construction materials, to name a few items.

The information in housing starts is easily interpreted, and the information on building permits can be utilized to determine the future needs of real estate properties. Moreover, it’s quite comprehensive, considering that it excludes only 5 percent of the total residential construction in the country.

Things to Watch Out For

Sadly, the report doesn’t really take into consideration the sizes and even the quality of the homes built, which can also have an impact on the real estate industry. It also doesn’t create major shocking trends but may obtain short-term patterns or results (usually month to month). It is also very limited, giving a lot of focus on the economy of the country.

Needless to say, the report is highly useful for investors who want to know more about the real estate markets.

Tags: