September Housing Starts and Permits
Economics in a nutshell: “Home construction continues to improve but there is still a long way to go before we get back to a normal housing market.”
INDICATOR: September Housing Starts and Permits
KEY DATA: Starts: +6.5%; 1-Family: 0.3%; Multi-Family: +18.3%; Permits: -5%; 1-Family: -0.3%; Multi-Family: -12.1%
IN A NUTSHELL: "The stronger dollar is beginning to bite into exports and the trade deficit is soaring as a result."
WHAT IT MEANS: Housing has been a leading light in the economy and it continues to hold its leadership position. Housing starts increased sharply in September, rising to the second highest pace in eight years. This past June's rate was the strongest since October 2007, so all we really did was retrace the easing we saw in July and August. The increase came from a surge in the multi-family segment of the market. Rental demand is skyrocketing, as are rents, and that is causing developers to look toward building apartment buildings. Still, this segment is extremely volatile. For example, starts in buildings which contain five or more units surged by 39% in June and then fell by 25% in July. That reminds us to be very cautious when evaluating one month's housing numbers. As for the single-family segment, activity continued its fairly steady, but modest rise. Will the construction pace continue to rise? Housing starts declined, again because of the volatility in the multi-family segment. But that was the monthly data. So far this year, total housing starts are running about 4% below permits, so there is some room for improvement. But there is a warning sign in the total starts and permits details. Permits for single-family homes are actually lagging starts, meaning there is no backlog of permits that builders need to draw down. That implies the improvement in the single-family portion of the market may be slow.
MARKETS AND FED POLICY IMPLICATIONS: When you look at the domestic portion of the economy, conditions continue to be good and housing is one big reason. Construction activity is solid. Yesterday it was reported that homebuilder confidence hit its highest level in a decade. Housing prices are starting to accelerate again and are rising at a 6% to 7% rate, depending on which source you use. And with millenials starting to form households at a growing pace, the demand for shelter should only increase. But the Fed seems to be using binoculars to look at the economy, as it is the rest of the world, not domestic demand that seems to be the focus of attention. Or maybe it is not emerging markets or China they are worried about. I am not sure. The next FOMC meeting is next week so we should wait a little while to find out what the members are thinking. Regardless, today's housing report should remind investors that it is not just companies that matter. Where those companies get their earnings growth from may make even a bigger difference. The U.S. economy may not be booming, but it is in pretty decent shape.
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