Q&A WITH MARK SPRAGUE
Mark Sprague is a noted and respected expert on the real estate industry and the Austin market, in particular. He is also the Director of Business Development for Mission Mortgage and we are fortunate to have access to his expertise and opinions. To help our blog readers understand what is happening in the economy and the housing market, Mark will be periodically featured on our blog answering questions that we’ve heard during his presentations. Here is another great entry about Housing Starts, which were reported this week.
July results for housing starts were released this week by the U.S. Commerce Department and showed a modest increase of 1.7%, surpassing the expected increase of 0.2%. After a significant drop in June, July’s rebound was welcome news to the real estate industry. Notably, the increase in July was led by starts of homes with five or more units, which surged 32.6%. Single-family starts decreased by 4.2% for the month. Also worth noting, the South region was the only of four regions to gain, but was enough to lift the overall results. Texas lies within the South region.
Question: I understand that when housing starts increase, that must be a good sign. But what does this statistic really mean and why is it important?
What is it: Records the number of new homes being built and permits for the future construction.
Release time: Normally released 2 to 3 weeks after the month covered.
Source: Census Bureau, Dept of Commerce
Revisions: Modest revisions normally occur for the proceeding two months on housing starts and one month on permits. Seasonal adjustments are made every April.
Why is it important? Looking for a single indicator that can foresee the future direction of the economy? Forget it you won’t find any. However of all the indices one comes surprisingly close – housing! Excluding one brief instance, there has never been a recession in the US data a time when the housing sector stood strong. Only once since WWII did the economy contract despite a robust housing market, and that was in 2001. Even then, the recession was short-lived and not very deep. This impressive track record is why may economists and experts view homebuilding as one of the most reliable leading indicators of economic activity. Residential real estate is among the first sectors to shut down when the economy nears recession, and it is the first to show growth when the economy begins to turn up.
What makes housing so far ahead of the rest of the economy? Sensitivity to interest rates and credit. Any strong economy drives interest rates higher. As mortgage rates climb, this depresses demand for homes and slows demand for speculative construction. Builders / companies are less likely to seek loans when rates are high. Conversely, when mortgage rates tumble and home prices decline –( events that typically happened during periods of economic weakness.
Another critical aspect of the homebuilding industry is how powerful an influence it has on the rest of the economy through what are known as “multiplier effects” (how much the one dollar moves down the economic chain). New construction has major ramifications for many industries. A jump in residential construction drives up demand for steel, wood, electricity, glass, plastic, wiring, piping, oil, concrete, etc. nationally. Locally there is the need for skilled labor, slab and flatwork, carpenters, electricians, truck drivers, forklift operators, etc.. This labor has family…..they go out to restaurants, shop locally. An estimate is that for every 1,000 single family homes under construction, some 2500 full time jobs and nearly $100 million in wages are generated.
How are Housing starts considered? Housing starts is the number of privately owned new houses (technically housing units) on which construction has been started in a given period. This data is divided into three types: single-family houses, townhouses or small condos, and apartment buildings with five or more units. Each apartment unit is considered a single start. The construction of a 30-unit apartment building is counted as 30 housing starts.
Why Housing permits? 95%+of all localities in the US require construction firms to obtain authorization before the first shovel / blade touches the soil. By tracking the issuance of permits, one can get a sense of how much and where future construction activity will take place. Because housing permits are such an excellent marker of future homebuilding and economic strength. They are one of the 10 components that make up the conference boards index of leading economic indicators.
How is it computed? The census Bureau conducts telephone interviews and sends our mailers to builders in 19,000 municipalities across the country during the first two weeks of each month to inquire about the number of construction starts and permits filed in their regions. What is a housing start? When excavation of a foundations starts! Adding a room, basement is not counted. Housing figures do not include construction of mobile homes, dormitories, room houses and hotels.
Impact on financial markets
Bonds Good news is housing is often perceived as bad news for the players in the fixed income markets. A healthy increase in hosing starts depicts an economy that is robust and where inflation pressures are likely to accelerate. That has an effect that knocks down bond prices and causes yields to rise, leading to losses on bond portfolios. Most bond traders prefer weak or falling housing starts because they show a slowing economy with less inflation…….factors that raise bond prices.
Stocks Prolonged weakness in housing starts can alarm stock investors since historically it has been a precursor to a broader downturn in the economy. If the market is vibrant and inflation remains contained, shareholders will view it as a positive sign. (as explained earlier, a rebound in new home sales ahs a beneficial impact on other businesses as well. This is bullish for corporate profits and stock prices.) The caution comes when housing starts surge at a time when the rest of the economy is already operating at full speed. Investors historically withdraw from stocks as worries mount that the Fed. Reserve will raise short term interest rates to slow the economic activity to prevent hyper inflation.
Dollar Investors are attracted to the US if thy can earn a higher return here relative to what they can receive in other countries. A strong housing report is considered bullish for the dollar because it historically (most of the time, there are always exceptions) supports higher corporate profits and a firming of US interest rates.