Economic Indicators: Housing Starts

The “New Residential Construction Report,” known as "housing starts" on Wall Street, is a monthly report issued by the U.S. Census Bureau jointly with the U.S. Department of Housing and Urban Development (HUD). The data is derived from surveys of homebuilders nationwide, and three metrics are provided: housing starts, building permits and housing completions. A housing start is defined as beginning the foundation of the home itself. Building permits are counted as of when they are granted.

The report is released monthly and data is from the prior month so it is timely. Housing starts can be volatile so it makes sense to look at an average of several months to get an accurate picture of any trends. The report is subject to revisions and they are not uncommon.

Why Housing Starts are important

Increases in the demand for newly-constructed homes can be an indicator of increased prosperity and possibly for a tightening supply of existing homes for resale. This indicator can also be a sign of job growth in the construction industry, including companies that act as to suppliers to home builders.

Increased demand for new homes can lead to increased demand for products that these home buyers will need, such as new appliances (stoves, refrigerators, etc.), furniture and others leading to increased sales and employment in those industries.

An increase in housing starts can have a ripple effect through the economy. Likewise, a continued downturn can portend a contraction in the economy, or at least in the sectors directly and indirectly impacted.

Housing starts can vary by region of the country and can be impacted by variables such as the weather in a given month.

Strengths of Housing Starts

• Very forward-looking, especially building permits; a good gauge for future real estate supply levels
• Can be used to identify business cycle pivot points
• Sample size covers approximately 95% of all residential construction in the U.S.

Weaknesses of Housing Starts

• No differentiation between size and quality of homes being initiated, only the nominal amount
• Only focuses on one area of the economy
• Can be impacted by variables such as the weather and by differences in the economies of certain regions in the country