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A critical predictor: Housing starts rise back above 1 million

Brent Nyitray, CFA, MBA

Homebuilder must-know: July 2014's starts, sales, and prices (Part 1 of 5)

Housing starts are a critical predictor of future homebuilder sales

Housing starts are released jointly by the Census Bureau and the Department of Housing and Urban Development. Analysts use the information to anticipate future production for homebuilders, future demand for raw materials, and labor costs. This data will even affect the forecasts for home-related retailers, like Lowe’s and Home Depot.

Housing starts cover the number of privately owned housing units that started in a given period. For multi-family units, each individual unit is considered a housing start. If there’s a lot of multi-family construction happening, then housing starts can become elevated, and investors must take care not to read too much into the builders of single-family homes.

Both single-family and multi-family starts increase

Housing starts rose from an upward-revised 975,000 to 1,052,000. Multi-family starts were 423,000 in July—an increase from the 318,000 pace in June. Single-family starts increased from 606,000 to 656,000. Single-family starts have been much more stable than multi-family starts and have shown a steady rise.

Starts fall in the south

Starts rose in the northeast (from 100,000 to 144,000), the west (from 231,000 to 274,000), and the south (from 396,000 to 511,000). They fell in the Midwest.

Implications for homebuilders

Homebuilder earnings season is over. The builders generally increased their top lines by raising prices, not by selling more units. If anything, a typical report would be a 12% increase in ASPs (average selling prices) and a 10% drop in deliveries.

Most builders—like Lennar (LEN), Pulte (PHM), D.R. Horton (DHI), and KB Home (KBH)—noted traffic was beginning to decline as buyers experienced sticker shock, both with housing prices and interest rates.

Generally, the industry is waiting for the return of the first-time homebuyer. As the economy improves, this buyer represents a tremendous amount of pent-up demand that will drive homebuilder earnings for years to come.

Investors who want to invest in the sector as a whole should look at the S&P SPDR Homebuilder ETF (XHB).

Continue to Part 2

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