A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week

May 26, 2015

Building momentum: housing starts
Total housing starts, annual rate

chart

Source: Bloomberg, as of 4/30/2015. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The housing sector showed new signs of life in April as housing starts and building permits jumped to post-recession highs.
  • Both starts and permits were much stronger than expected in April. Starts came in at an annual rate of 1.135 million units—120k above expectations, and the most since November 2007.
  • Meanwhile, permits were 79k better than anticipated at a rate of 1.143 million, the most since June 2008.
  • That's welcome news for the US economy and helps revive hopes of a bounce back in growth that disappointing job growth and retail sales figures have called into question.
  • It's important to realize that housing data is choppy month to month; April's robust gains follow weak reports in February and March, which were almost certainly affected by harsh weather.
  • So it remains to be seen whether April's strength is simply a return to form or the start of a stronger trend.
  • In principle, the housing sector has plenty of potential demand to support expansion. The US population has grown, but new houses have not—housing starts remain well below the average of 1.446 million since 1959 and have averaged just 767k over the last seven years.
  • More broadly, if homebuilding does accelerate in the near term, it could conceivably be a factor encouraging the Federal Reserve to raise rates sooner than later.
  • Any such increase in interest rates could actually increase short-term housing demand by encouraging more potential home buyers to act before mortgage rates move higher.

The chart:

  • The chart shows the monthly, seasonally adjusted annual rate of total housing starts in the US over the past 5 years.
  • Housing starts increased 20.2% in April 2015 to a 1.135 million annual rate and were up 9.2% relative to April 2014.
  • The record high for housing starts was 2.207 million in January 2006 (not shown in graph).

Definitions:

Housing starts refers to the number of new residential construction projects that have begun during any particular month.

Building permits refer to the necessary government or regulatory authorization that must be granted before construction of a new house can begin.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.


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