INDICATOR: December Housing Starts and Permits
KEY DATA: Starts: -9.8%; 1-Family: -7%; Permits: -3%; 1-Family: -4.8%
IN A NUTSHELL: "Despite really bad weather, builders still managed to keep digging and that is a great indication that the housing market continues to move forward."
WHAT IT MEANS: It's hard to do a lot of construction in the bitter cold and snow but that still happened in December. Yes, it appears that home construction plunged in December but as usual, the headline numbers hardly tells the story. There was an incomprehensible 23% surge in starts in November so a slowdown was hardly a surprise. Indeed, the November construction pace was the greatest in six years. Meanwhile, the December "slowdown" only took us back to the third greatest rate in 5½ years. So much for a faltering in the market. Not surprisingly, the Midwest posted a huge decline, falling 33.5%. There was also a softening in the South but a solid gain in the West. Conditions were surprisingly stable in the Northeast. Also, the volatile multi-family component showed why it is volatile, dropping 15%. Single-family homes were off only 7%. As for conditions going forward, permits, which had been running above starts, are almost back in line. Thus, we should be seeing starts close to or slightly above current levels given that homes permitted but not started are still rising and the number of homes under construction is also going up. For all of 2013, housing starts rose a robust 18.3%. Don't expect anything near that this year.
MARKETS AND FED POLICY IMPLICATIONS: Everything considered, this was not a bad report. Weather and an inexplicably strong November made the nearly double-digit drop in starts something we can easily live with. The rebounding housing sector has been a key factor in keeping growth going. Indeed, given all that Washington did to slow things down, without construction surging, we could have been in trouble. Since Congress has passed a bill that will have much more modest fiscal restraints, any moderation in home construction growth can be handled easily, especially if the labor market improves and wages start rising. This report seems to point to continued improvement in housing but the big gains are likely behind us. That will not worry most Fed members as they actually understand how the data and the housing sector work. How traders will read these numbers is anyone's guess. But it is earnings season and that will likely drive trading.