Housing starts were up this past month as we come out of a fairly cold winter. New home starts were 549,000, which was lower than expectations, but better than last month. Furthermore, the cold winter storms in January and February delayed some of the starts. Still, the bounce back in residential construction does not signal recovery as an over- supply of homes continues to discourage builders from embarking on new projects. Home builders sentiment slipped a notch in April, from the National Association of Home Builders on Monday, with builders viewing sales conditions now and in the next six months as unfavorable.
Why do we care about housing starts? 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. As we have discussed in the past when $1 is invested in constructing a house it employs a lot of people from engineers, to architects, plumbers, carpenters, various contractors, etc. This in turn spurs income for all the suppliers which requires them, if demand is high enough, to hire more workers, etc. For each $1 that is invested it creates roughly $4 in economic activity. This is why NO economic recovery has ever occurred with housing leading the way.
Furthermore, 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. 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.
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. Therefore, in order to get a better look at the overall trend in housing we look at not only the rolling 12-month average of home starts but the year over year change in home starts as It takes several months to establish a trend.
As you can see not only is the 12 month average sharply declining which is USUALLY indicative of a recessionary phase in the economy but the year-over-year change is very close to starting a secondary decline to new lows as housing starts remain at very depressed levels.