Permits, given their forward-looking ability, are helpful in multiple ways; they're included in leading economic indicators data issued by the Conference Board, for instance.
Tracking trends here is important. Remember the May jump in the earlier example? Permits for new housing fell 3.7 percent in June, but the more volatile multifamily segment was the culprit; a closer look reveals permits for single-family homes rose that month. Arguably, single-family building permits are the most important number within this report.
Investment likely to be affected: Manufacturers and distributors of building materials, such as USG Corp. (USG) and Eagle Materials (EXP), which makes gypsum wallboard and cement.
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Single-family starts. This is most reliable figure since it gauges true consumer confidence, whereas multifamily units are driven more by speculative investment.
Take the May example, where the headline figure and building permits diverged; a drop of multifamily housing starts to an annual rate of 179,000 from 217,000 in April accounted for the loss in new construction. Starts of single family homes rose 3.2 percent month-over-month to a 516,000 annual rate.
Perhaps most helpful for investors is drilling down on the details: For instance, in July, single-family permits in the West reached their highest level since August 2008.
Investment likely to be affected: Community development builders that span mid-market pricing to upper-end pricing, including: D.R. Horton Inc. (DHI), Lennar Corp. (LEN), and Toll Brothers, Inc. (TOL).
Multifamily measure. It's volatile, sure, but it still tells a story. During the recession, foreclosures boosted demand for rental property. The country's largest East and West Coast metros dominate the market, but trends in urban migration may be changing some with an aging baby boomer population.
Investment likely to be affected: Real Estate Investment Trusts (REITs) focused on apartment buildings can be a diverse way to add some real estate exposure, with stock-like characteristics, to a portfolio. Among the names: Mid-America Apartments (MAA), AvalonBay (AVB), and Essex Property Trust (ESS). Some include high-end properties, such as Equity Residential (EQR).
Think location. Housing starts data is divided into four geographical areas of the country, which gives a better sense of the differences in economic conditions for each; the regions often show a different rate of change each month and sometimes there is divergence, with some areas improving and some dropping.
Investment likely to be affected: Camden Property Trust (CPT) is an apartment REIT concentrated in the Houston region, for instance. So, if an investor was optimistic for continued growth in the metropolitan area, he or she might hone in on this region-specific play. Not so big on Texas? Explore REITs specific to other regions.
No matter what category you opt to give a closer look, keep in mind the monthly volatility in this report. For example, overall housing permits fell 3.7 percent in June due largely to a sharp drop in multifamily permits in the South, a giveback from a stronger reading in May. Such readings should prompt you to put added emphasis on monthly trends, not just change. Exploiting a short-term reactionary move in a stock or ETF may allow you to add to a position that supports your longer-horizon stance.
Corrected on 08/01/2012: A previous version of this story incorrectly identified Robert Denk. He is the senior economist at the National Association of Home Builders.
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