Around the middle of each month at 8:30 EST, the Bureau of the Census within the Department of Commerce produces the previous months Housing Starts, Permits, and Completions. It is compiled from about 19,000 localities, regarding new single family homes and buildings. It is also broken down by the following regions: Northeast, Midwest, South, and West. Buildings factored in are both public and private, excluding mobile homes. In addition, each single apartment unit is considered a single start.
If the numbers fall in line, it is not a large market mover as the market will make adjustments in anticipation of the stats. Markets most influenced by these figures are interest rate sensitive securities, such as those found in the mortgage and bond markets. As a result, Housing Starts, Permits, and Completions are reliable leading indicators of future interest rates. Overall, it represents 25% of investment dollars and 5% of the economy.
A coincidental economic indicator, it tends to trend higher as the economy expands. Conversely, declining trends signal economic slowdown and sustained downward pressure could trigger recession.
Furthermore, higher than expected growth is viewed negatively as it fans the fears of inflation. Increasing interest rates have a ripple effect, decreasing bond prices and yields, followed by the reduction of qualified borrowers, reducing overall consumptions, with the end result of tapping the breaks of the economy.
Investment professionals have come to rely on the numbers because it is forward looking, it is near term data, and it is adjusted for seasons and weather. However, investors should keep in mind that building permits do not confirm construction; it merely anticipates economic activity as construction could begin several months after approval. What's more is that there is no differentiation in home values, where upscale condos in Newport Beach would weigh the same as public housing units in Compton.
In analyzing trends, typically it takes 4 months to establish an underlying trend for building permits, 5 months for total starts, and 6 months for total completions. With this data weighing heavily upon the economic forecast, this will help investors identify pockets of strength and weakness to maximize returns and minimize risks.
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