Housing Starts Explained: Metric for Real Estate Investors

In most economies, there are major non-financial indicators that point to the growth of the country’s economy. These indicators are often assets pegged to large amounts of money and referred to as non-financial assets. A universal example of a non-financial asset is gold. Around the world, people exchange their local currencies for gold bars, mostly as an immunity to rising inflation or a way of saving money. There are also other examples of non-financial assets like land, buildings, motor vehicles, and intellectual properties, to mention a few.

In the United States, housing is one of the significant indicators that denote the strength of the country’s economy. Many US investors evaluate housing metrics before engaging in any financial investment. The 2007-2008 financial crisis (also known as the subprime mortgage crisis) shrank due to the collapse of the housing market. The abuse of the US mortgage funds destroyed the healthy housing market giving rise to an irreversible spike in the cost of living of people all around the globe.

The guide below will enumerate the essential components and precepts surrounding housing starts. It will also help us define the relationship between investors’ behaviours and the housing market.

Housing Starts Defined

Housing starts evaluate the number of newly constructed private residential housing units across the US. This metric simply indicates the commencement of constructional activities of residential apartments belonging to individuals.

Housing starts is one of the oldest databases collected monthly by the US Census Bureau and the US Department of Housing and Urban Development (HUD). These data play a major role in reflecting the strength and viability of the banking, construction, and real estate industries.

Housing Starts as Economic Leading Indicator

Generally, Americans are usually willing to spend once they have more income and are likely to acquire new houses. However, they are less likely to carry out such purchases under unfavourable conditions. Housing works as a major indicator of the economy’s health due to its cross-sectional impact on several sectors of the economy. During the construction of a housing unit, the builders spend on lumbering, painting, raw materials purchases, and hires. After the successful completion of the house, the occupants spend on consumer products like furniture, appliances, and other household items. Therefore, a decline in housing starts indicates an impending and devastating dip in the sales of commodities and hires (employment). A steady increase in housing starts signifies a greener pasture for various sectors of the economy at large.

In clearer terms, housing starts work as a leading economic indicator by indicating the spending prowess of an average US citizen. A simple statement says that “the more housing starts there are, the more money flows into the economy.” Financial regulations from the Fed or interest rate increases discourage the construction of houses, thereby decreasing the number of house starts.

Components of Housing Starts

It is pertinent to note that housing starts do not include houses built by the government or group quarters like dormitories. Housing starts involve houses built exclusively by individuals and private real estate companies. Government holdings and projects cannot be a yardstick for evaluating the economy’s growth.

How then is the housing start calculated? How is it counted? Housing starts are the total number of new construction projects within a particular month. As earlier stated, housing starts count only when groundbreaking or excavation begins. Other stages of house building conditions like permitted, authorized not started, under construction, or newly completed do not count for house starts.

There are a few categories of housing counted during housing starts monthly. These categories include the following:

1. Single-family housing. It includes the number of new single-family homes that have freshly begun construction. Single-family housing starts are easier to calculate during the collation of data.
2. Multi-family housing. Calculation cuts across two types of multi-family housing. The first type is a multi-family housing of two to four units, while the other is multi-family housing with five or more units.

The total housing starts include single-family housing starts, multi-family housing with two to four units, and multi-family with five or more units. However, only data for single-family housing and multi-family with five or more units are provided on a seasonally adjusted and unadjusted basis. Extracted data for multi-family housing with two to four units is provided only on an unadjusted basis.

Other housing indicators like building permits and new home sales can serve as an additional context for analyzing the current housing markets. These indicators cannot serve as a primary basis for counting housing starts.

Release of Housing Starts and Reading Them

The US Census Bureau accounts for housing starts from a representative sample of building permits issued by local permitting offices. The regulatory body further tracks these registered projects through completion and sales. In general, multi-family housing with two to four units accounts for a small percentage of housing starts.

Housing data starts are released at a seasonally adjusted annual rate (SAAR). It represents the total number of housing starts that would occur in a year. The data report may include month-over-month and year-over-year percentage changes in housing starts, thereby easing the comparison of trends. Housing starts are also affected by seasonal volatility and regional locations. Housing starts to decline during the winter months due to unfavourable construction conditions in some regions of the country.

On the 12th working day of every month, the Census Bureau and HUD release housing starts at 8:30 a.m. ET. The housing starts is formerly titled “Monthly New Residential Construction,” followed by the month and year of release. In addition to the monthly release, the two reporting agencies release data quarterly and annually. Sometimes, previously released data are revised and updated.

Housing Starts for Individual Investors

To begin with, housing starts reports play a crucial role in indicating economic health, employment rate, and consumer spending. A typical individual investor evaluates various economic data before restructuring or delving into any investment. Housing starts is one of the key metrics used to provide insight into effective portfolio management.

Housing starts affect several categories of companies, namely: residential building companies, mortgage lenders, and other commodities companies. The trend of housing starts can provide a solid projection of what the economy will look like in the future. Sometimes, increased housing starts can cause inflation and breed a stronger pace of economic growth. Against the regular perception, a decline in housing starts is not a bad market for bond investors.

Investors can also combine and compare new and previously owned home sales data with housing starts for an overall analysis. New home sales reflect the housing prices as well as families’ and individuals’ long-term financial obligations.

Bottom Line

In recap, housing starts is the total number of newly constructed private residential apartments. It has remained a great indicator of the US economy since its inception in 1959. A deep analysis of housing starts can help US investors and citizens prepare for the economic situation ahead. Investors can use this as a yardstick to invest in stocks or involve in mutual funds. A strong tool like housing starts helps investors have an overall trend idea.