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A Closer Look at the August 15 Drop in Housing Starts

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Housing starts ticked down

Housing starts fell from a downward-revised ~1.16 million to ~1.13 million in August 2015. This was below Wall Street estimates of just over 1.16 million. We also saw declines in single-family starts, which fell to 739,000 from 762,000. Multi-family starts fell to 381,000 from 390,000.

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Regional results

The US Northeast had the biggest drop in starts—to 108,000 from 163,000. The South increased to 602,000 from 562,000, while the West Coast was basically flat. The Midwest dropped as well. Many participants were worried that the drop in oil would crimp economic activity in the South, which would cause a further drop in housing starts. But so far, that isn’t happening.

The real estate market in big cities is undoubtedly being influenced by foreign investors who want to diversify their holdings and are encouraged by the strength of the dollar. In addition, wealthy Chinese investors are taking advantage of the visa program, which promised a free green card to anyone who invests $500,000 and creates ten jobs. This is sending cheap capital to developers as well.

Implications for homebuilders

We have just started earnings season for the homebuilders, which you can trade via the S&P SPDR Homebuilder ETF (XHB). Lennar Corporation (LEN) posted decent numbers for its third quarter. Note that Lennar and KB Home have November fiscal years, which means they report about a month earlier than everyone else. Most builders are at least beginning to build out multi-family construction to take advantage of the white-hot rental market. Toll Brothers (TOL) has been aggressively pushing into luxury urban apartments in big cities.

Last quarter, builders generally increased their top lines by raising prices, not by selling more units. Homebuilders continue to fear being caught with inventory if the economy turns down. Given the already tight inventory out there, which we’ll cover later in this series, builders should be stepping in to fill the void.

That said, we’re seeing more appetite at the lower price points, which may mean first-time homebuyers are finally returning to the market. This would be good news for the entire industry. D.R. Horton (DHI) and PulteGroup (PHM) are aggressively targeting first-time homebuyers with new brands.

Read on to the next part of this series, wherein we’ll analyze the building permits increase in August 2015.

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