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.
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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 fell from 1,071,000 to 1,001,000. Multi-family starts were 366,000 in April—a decrease from the 399,000 pace in April. Single-family starts decreased from 644,000 to 625,000. Single-family starts have been much more stable than multi-family starts and have shown a steady rise.
Starts in all four geographic areas
Starts fell in the northeast (from 127,000 to 95,000), the midwest (from 206,000 to 172,000), and the west (from 245,000 to 205,000) and rose in the south (from 493,000 to 529,000).
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).