Learn more about housing starts, and what they mean for both investors and buyers.
Definition and Example of Housing Starts
A housing start is another name for a new residential construction project. The housing start is registered once construction of a new building begins. There are different stages of new housing construction; the start usually happens when the foundation of the building is excavated. All the stages are:
PermittedAuthorized but not startedStarted Under constructionCompleted
Housing starts can provide valuable information about the economy. For example, researchers can look at decades of housing starts to get an idea of how housing growth has been affected by population growth. The housing industry plays an important economic role. Spending on housing services made up 17.5% of the United States’ gross domestic product (GDP) in 2020. Because of this, investors can look to housing starts as a tool for informing their investments. If there are sustained declines in housing starts, this can be a sign that the economy is going to slow down. A recession may be on the way. On the flip side, if housing starts begin to expand in number, that can be a sign of impending economic growth.
How Housing Starts Work
Housing starts can cause a ripple effect throughout the economy, which can affect financial markets and investment portfolios. Investors can use economic data such as housing starts to get insight into what is going on in the economy, and how they should be managing their investment portfolio. There are a number of reasons housing starts are a strong indicator of what is happening in the economy. Home builders tend to avoid kicking off construction on a home unless they are confident they can sell the home before or after they finish building it. Because of this, housing starts can be a strong indicator of how much demand there is for homes and what’s happening in the residential construction industry. When construction on a new home begins, more money is pumped into the economy. The work on the house creates new construction jobs, along with adding in the spending for construction supplies. Once the home sells, the builder generates revenue. The buyer also puts even more money into the economy by making purchases such as buying new furniture and appliances or hiring painters, landscapers, or other contractors. This is where the ripple effect comes in. Housing spending creates additional consumer spending. In the United States, consumer spending makes up 70% of the economy. The more housing starts there are, the more money flows into the economy.
What It Means for Individual Investors
While individual investors should look at a variety of forms of economic data to inform their investments, housing starts are one way they can get insight into how to manage their portfolios. Housing starts directly influence the value of commodities, stocks, and bonds. Typically, housing starts are the most closely followed report on the housing sector. This is because of how much they can reveal about the state of the housing market. For example, there are many companies that are impacted by the housing industry, such as residential building companies, mortgage lenders, or companies that sell building materials, furniture, or appliances. Any of these companies might have stock, or be part of a mutual fund, that you want to invest in. Knowing if the number of housing starts is going down or up can give you an idea of how a relevant investment could perform in the coming months and years. All of this being said, it’s important to keep certain trends in mind when it comes to housing starts. For example, it’s well-known that housing starts experience seasonal volatility and slow down during winter months when it’s harder for construction projects to begin in certain parts of the country. Because of this, you may want to look at several months of data on housing starts to get a sense of overall trends. There are also regional trends when it comes to housing starts, since certain regions require much higher rates of residential building than others.
