INDICATOR: August Housing Starts and Permits
KEY DATA: Starts: +0.9%; 1-Family: +7.0%; Multi-Family: -11.1%; Permits: -3.8%; 1-Family: +3.0%; Multi-Family: -15.7%
IN A NUTSHELL: "Home building is still improving but the pace seems to be flattening and with higher rates kicking in, the prospects are for minimal gains going forward."
WHAT IT MEANS: The FOMC is meeting and we will know soon enough what the plans are for quantitative easing. Regardless of today's decision, just the discussion about tapering has already led to mortgage rates shooting up. Since housing has been one of the chief beneficiaries of the Fed's low rate policy, the jump in mortgage costs has raised concerns about home construction and sales. Right now, it is really unclear what the impact has been. Housing starts rose in August but the July pace was revised downward. After faltering sharply in June, construction activity has improved the past two months but still remains below the average for the year. The problem in August was multi-family activity. This segment was down sharply but it is also extremely volatile. On the other hand, single-family activity hit its second highest pace for the year. That holds out hope that construction will not be greatly hurt by rising mortgage rates. Indeed, if you look at permit requests, while they were down in August, they continue to run well above start levels. That implies we will indeed see more construction in the months to come. Regionally, starts rose only in the South. However, single-family building activity surged in the West and Northeast and those areas could be leading the way going forward.
MARKETS AND FED POLICY IMPLICATIONS: To taper or not to taper, that is the question? Actually, it is not the question since tapering has to occur sometime in the relatively near future. What the Committee does today almost doesn't matter, almost. The markets have priced in, at least to some extent, a move and putting off the process would not make a huge impact. What matters is the description of the process going forward. I expect the statement to make clear (as much as the Fed can make anything clear) that reducing asset purchases is not a straight-line event. The Committee will watch the incoming data carefully and disappointing economic numbers or wacko government policy could put the process on hold. But saying that and doing that are two different things. Unless the FOMC backs up its words with inaction, that is, it doesn't accelerate the tapering in the face of soft economic reports, the markets will build in consistent reductions in asset purchases. That would likely mean further rate hikes though not nearly at the pace we have seen over the past few months.