What Is Housing Starts?
Housing starts represent a key economic indicator within real estate economics, specifically in the realm of macroeconomics. It measures the number of new residential construction projects on which ground has been broken during a given month. These figures are typically divided into three categories: single-family homes, multi-family homes (two to four units), and multi-family buildings (five or more units). As a forward-looking metric, housing starts provide insight into the health of the housing market and broader economic cycles.
History and Origin
The collection and analysis of housing starts data became increasingly important following significant economic downturns, as policymakers and economists sought better ways to gauge economic activity. In the United States, official housing starts data has been collected and reported by the U.S. Census Bureau since the 1940s. The data provides a crucial early look at construction spending, which is a significant component of Gross Domestic Product (GDP). Organizations like the Urban Land Institute (ULI), founded in 1936 to address land use and real estate trends, have historically emphasized the need for objective data in urban planning and development, further highlighting the importance of metrics like housing starts.9,8,,7,6
Key Takeaways
- Housing starts measure the beginning of new residential construction projects.
- They are a significant leading economic indicator, reflecting market confidence and future economic activity.
- The data is typically segmented by type of dwelling: single-family, and multi-family.
- Trends in housing starts can signal shifts in supply and demand within the housing market.
- This metric influences and is influenced by broader economic factors like interest rates and employment.
Interpreting Housing Starts
Interpreting housing starts figures involves understanding the context of the broader economy and the housing market. An increase in housing starts generally indicates strong consumer confidence and economic growth, suggesting that builders are optimistic about future demand and that consumers are willing and able to purchase new homes. Conversely, a decline can signal a slowdown or potential recession, as it reflects reduced builder confidence and potentially weaker consumer purchasing power. Analysts often look at both the raw numbers and the annualized rates, as well as month-over-month and year-over-year changes to identify trends. It is also common to compare housing starts with building permits, which are an even earlier indicator of construction activity.
Hypothetical Example
Consider a hypothetical scenario where the government releases monthly housing starts data. In January, the report shows 1.5 million annualized housing starts, a notable increase from the previous month's 1.4 million. This positive trend, if sustained, might suggest a strengthening economy. For instance, if a major homebuilder like "Green Acres Development" announces plans to break ground on 500 new homes in a suburban area, these would contribute to the overall housing starts number for that period. This influx of new homes could impact local housing prices and stimulate economic activity in related sectors, such as materials suppliers and construction services.
Practical Applications
Housing starts numbers are closely watched by various stakeholders across the financial and real estate sectors. Investors use them to assess the health of construction companies, real estate investment trusts (REITs), and companies that supply building materials. Economists integrate housing starts into their models to forecast economic growth and identify potential turning points in economic policy. The Federal Reserve, for example, monitors housing starts as part of its assessment of the overall economy when considering monetary policy adjustments. Data from the Federal Reserve Economic Data (FRED) system provides comprehensive historical series for housing starts, which are crucial for this kind of market analysis.5,4 Additionally, fluctuations in housing starts can influence the performance of related industries, such as mortgage lending and home furnishings, and signal potential shifts in residential investment.
Limitations and Criticisms
While housing starts are a valuable indicator, they have limitations. The data can be volatile month-to-month and is subject to revisions, which can make it challenging to discern underlying trends immediately. Furthermore, housing starts only indicate the beginning of construction, not its completion or actual sale. External factors, such as severe weather, natural disasters, or unexpected shifts in credit markets, can also cause temporary distortions in the data. For instance, in times of economic uncertainty, commercial real estate markets can face significant challenges, with banks reporting pain on delinquent commercial real estate loans, which can indirectly impact new residential development.3,2 Broader societal trends, such as increasing calls for sustainable development or the impact of climate change on urban planning, can also influence where and how new housing is initiated.1 This can lead to different types of projects or a slowdown in certain areas, even if the overall demand for housing remains.
Housing Starts vs. Housing Completions
Housing starts mark the point when construction begins, specifically when the foundation of a new residential structure is laid. In contrast, housing completions refer to the point when a new residential structure is ready for occupancy, meaning all construction work has been finished or substantially finished, and a certificate of occupancy has been issued. While housing starts provide a forward-looking perspective on future supply, housing completions reflect the actualization of that supply. The lag between starts and completions can vary depending on the type of housing and construction delays, making both metrics important for a comprehensive understanding of the housing market's dynamics and inventory levels.
FAQs
What causes housing starts to fluctuate?
Housing starts are influenced by a variety of factors, including interest rates, inflation, employment levels, consumer confidence, and the availability of financing. Economic policies and demographic shifts also play a significant role.
Why are housing starts considered a leading economic indicator?
They are considered a leading indicator because breaking ground on new homes signifies future economic activity. New construction creates jobs in the building industry, stimulates demand for materials, and often leads to subsequent purchases of appliances, furniture, and other goods, all of which contribute to the broader economy.
How does the Federal Reserve use housing starts data?
The Federal Reserve monitors housing starts as part of its assessment of overall economic health. Trends in housing starts can inform decisions regarding monetary policy, as they reflect business investment and consumer sentiment, both crucial for sustained economic stability.