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Why the housing starts and building permits plunged in June

Phalguni Soni

Economic indicators and earnings shrug off events overseas (Part 6 of 10)

(Continued from Part 5)

The U.S. Census Bureau released housing starts and permits data for June

The U.S. Department of Housing and Urban Development released the data for new home construction for June on Thursday, July 17. Housing starts fell 9.3% month-over-month (or MoM) in June to a Seasonally-Adjusted Annual Rate (or SAAR) of 893,000 units—the lowest level since September, 2013.

This figure missed consensus estimates of 1.026 million units. However, housing starts for June, 2014, came in 7.5% ahead over statistics reported for June last year. Housing starts for single-family homes fell 9% MoM to 575,000 units.

Building permits

The drop for building permits data was lower, which fell 4.2% MoM in June to a Seasonally-Adjusted Annual Rate (or SAAR) of 963,000 units. However, building permits increased 2.7% on a year-over-year (or YoY) basis.

Analysis of housing starts by region

Wet weather in the southern portion of the country caused the decline in housing starts. Housing starts in the South declined by almost 30% MoM, to 375,000 units in June. The South is the biggest housing market in the U.S. As a result, the numbers made an impact.

All other regions reported increases in housing starts and building permits with the Midwest increasing the most by ~28% MoM to 219,000 units.

Building permits declined in all regions except the Midwest, which increased 6.6% MoM. The greatest decrease was seen in the northeast region which recorded a fall of 15.5% MoM.

Outlook

Home sales already took a hit in the early part of the year, due to the increase in mortgage rates over 2013 levels and the polar vortex-related slowdown. Judging by the rate of recovery in the labor market, housing starts and permits data was disappointing. That said, the summer months generally see an increase in home construction which should benefit builders like those included in the iShares U.S. Home Construction ETF (ITB) and the State Street SPDR Homebuilders ETF (XHB).

Both ITB and XHB have holdings in companies like Lennar and PulteGroup and home improvement chains like Home Depot (HD). Home Depot is also part of the iShares Russell 1000 Growth ETF (IWF) and the Vanguard Growth ETF (VUG).

Going forward, wage growth and the rate of increase in mortgage rates would be critical in determining the health of the housing sector.

To learn about the retail indicators that released last week, please continue reading the next section in the series.

Continue to Part 7

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