Housing data can be a good economic and investing proxy beyond demand for big yellow excavators.
Swings in the month-over-month change for construction starts and property resales tend to drive housing and economic-sensitive stock prices in the short term. But housing reports are layered with figures that can inform investors beyond those quick hits. This might include what pockets of the home market (apartments versus single-family?) and which locales (Atlanta or Cleveland?) are standouts or laggards.
Sometimes the details within a single report diverge, which can be especially telling for investors trying to get a read on what's to come. Take May 2012 data (released in June): May housing starts fell 4.8 percent compared to April—a bearish news flash. A second look showed starts were up more than 28 percent from where they stood a year earlier. But the real attention-getter that month? Building permits. They rose to levels not seen in more than 3½ years. Permits tend to lead starts by around three to four months.
Let's take a quick tour of the government's monthly "housing starts" report and its potential impact on your portfolio.
Formal introduction. The New Residential Construction Report is this report's real name; it's usually referred to as "housing starts." It's released by the U.S. Commerce Department on or around the 17th of each month, at 8:30 a.m. EST, and covers the previous month (June's mid-month release covers May, and so on.) The report includes building permits (tracking legal permission to dig, usually about a three-four month lead), housing starts (records of foundations poured), and housing completions (typically a lightly followed figure on its own given the variance in project length, although a contributor to the overall economic picture). The report is compiled through surveys of homebuilders nationwide.
Headline housing starts. So what can housing starts tell us? There's the financing behind the deals, for one; stronger starts must mean a pick-up in bank traffic, right? Then there are the details that follow the deals—excited homeowners will rush out to buy new furniture and lawnmowers. Just as much investing intelligence can be gleaned from weak data as from strong figures. Think of the potential boost to big-box home-repair retailers when frustrated homeowners ride out a weak selling market by staying put.
Starts are used to predict the residential investment portion of gross domestic product, the broadest measure of economic performance.
The monthly report, a national aggregate, divides the data according to building types (single-family homes, two-to-four resident units, and five-or-more resident units). Single-family starts typically account for roughly 74 percent of all starts. Multifamily units make up the rest.
Investment likely to be affected: SPDR S&P Homebuilders ETF (symbol: XHB). XHB, trading near 21.89, has nearly doubled off its 52-week low of $12.22. ETFs tend to move in the short-term with headline figures. Also sensitive: The Home Depot (HD) and Lowe's Cos. (LOW).
Although he's increasingly bullish on building prospects, National Association of Home Builders Senior Economist Robert Denk said in a webcast that "caveats like tight lending standards and foreclosures could be a drag."
That's why some financial-sector analysts remain more optimistic for regional banking names, suggesting their lending spigots are looser and they're more nimble when it comes to responding to housing trends. Overall financial-sector volatility could persist. Some regional banks for consideration: Fifth Third Bancorp (FITB), M&T Bank Corporation (MTB), and PNC Financial Services Group (PNC).
Building permits. "The key numbers in this report are the housing permits—not the starts. The permits are better measured than starts, are less influenced by weather and are forward looking," say analysts at IHS Global Insight, in a report.