uploads///Housing starts

Why housing starts drop as multi-family starts take a breather

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Sep. 24 2014, Updated 4:46 p.m. ET

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. They also use it to predict future demand for raw materials and labor costs. This data will even impact 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, then housing starts can become elevated. Investors shouldn’t read too much into the single-family home builders.

Single-family and multi-family starts increase

Housing starts fell from an upward-revised 1,117,000 to 956,000. Multi-family starts were 304,000 in August—a decrease from the 444,000 pace in July. Single-family starts decreased from 659,000 to 643,000. Single-family starts have been much more stable than multi-family starts. They’ve increased steadily. Geographically, starts fell across all four regions.

Implications for homebuilders

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

Most builders—like Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), and KB Home (KBH)—noted that traffic was beginning to decline. Buyers experienced sticker shock from housing prices and interest rates.

The industry is waiting for the first-time homebuyer to return. As the economy improves, this buyer represents a tremendous amount of pent-up demand. This demand will drive homebuilder earnings in the future.

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

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