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Understanding housing starts and their impact on homebuilders

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Key indicators to watch

Housing starts are a key indicator of overall housing activity in the US. This indicator derives from nationwide surveys of homebuilders, and it’s released each month by the US Census Bureau jointly with the US departments of Housing and Urban Development.

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Housing starts

Housing starts indicate the number of housing units that began construction during a given period. A construction start marks the beginning of excavation for the foundation of the building. Construction starts mainly comprise residential housing. Sustained declines in housing starts slow the economy and can push it into a recession. As you can see from the chart above, single-family housing starts declined from Q1 2006 until Q1 2009. This was the period of severe recession. Likewise, increases in housing activity trigger economic growth.

Investors looking to invest in homebuilder stocks such as Lennar (LEN), D.R. Horton (DHI), and PulteGroup (PHM) or in homebuilder ETFs such as the SPDR S&P Homebuilders ETF (XHB) and the iShares Dow Jones US Home Construction Index Fund (ITB), should look at housing starts in conjunction with housing indicators like existing home sales, the rental component of the Consumer Price Index, and the Housing Price Index.

Impact on other consumer-based indicators

The housing starts report can also help create estimates for other consumer-based indicators. For example, people buying new homes tend to spend money on other consumer goods, such as furniture, home appliances, and lawn and garden supplies. You can use this tendency to gauge demand in consumer-centric industries.

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