Housing starts are one of the most crucial indicators for monitoring the nation’s economic health. Understanding the dynamics of housing starts is essential for real estate investors because it offers valuable insights into current market conditions, including how ready people are to buy, build, move, and more.
This article delves into the world of housing starts, including their role in the economy, what economic factors influence them, how to monitor them, and their significance to the industry.
What Are Housing Starts?
Housing starts are a measurement of residential construction and serve as an indicator of the economy as soon as the groundbreaking begins on a project. The U.S. Census Bureau, along with the Department of Housing and Urban Development (HUD), issue monthly housing starts data for the previous month around the 17th of each month.
Key housing and residential real estate statistics, which include housing starts, are released by the Census Bureau as the New Residential Construction report. This report contains building permits, housing starts, and housing completion information generated via building permit surveys and the Survey of Construction (SOC), which queries homebuilders across the U.S.
The report and data for all three significant statistics and the month-over-month and year-over-year changes are displayed.
Multi-Family vs. Single-Family Housing Starts
If U.S. housing starts show a decline in new single-family units relative to multi-family housing starts, it could be an indication that a supply shortage is emerging for single-family housing. This may steer segment price increases, forcing single-family homes to pay a premium.
A decline in housing starts also indicates that the public might avoid expensive homes in favor of more affordable multi-family housing units. In addition, housing starts includes reports on apartment construction, which disclose inventory segment details and outline whether prior build-ups exceeded expectations.
For example, provisional builders are initiating development of multilevel apartment buildings in urban areas. These builders foresee a rising demand rate for apartment space in certain cities and act accordingly.
However, in the event of a drop in demand for such housing, construction companies may withdraw their development plans. Housing demand impacts many things, including the decision to purchase new homes and homebuilding activity.
Factors Influencing Housing Starts
So what factors influence housing starts? Here are a few of the top reasons folks will see a shift in housing starts.
Let’s dive into a few economic factors that take a toll on housing starts:
- Interest rates: When the Federal Reserve tightens some of its policies, mortgage rates rise, which can suppress demand for homes. During this time, developers are unlikely to pull back on construction of new homes. This usually leads to fewer building permits and overall fewer housing starts. On the other hand, lower interest rates encourage consumers to take out loans and buy new homes.
- Market demand: Let’s say that investors sell their house at a low price to stabilize the market. If we think about it, an event such as a pandemic could cause an increase in house purchases, like it did during COVID. In reality, it’s all about what’s happening in the economy.
- Construction costs: Another critical factor affecting real estate’s value is overall construction costs. Builders nowadays are not only worried about the steep interest rates, but they are still facing supply challenges.
Legislation is another factor that can substantially impact property demand and prices. For example, tax credits or deductions are just a few ways the government can temporarily boost demand for real estate. It’s important to be very aware of current government incentives.
According to the Home Building Geography Index (HBGI) from the National Association of Home Builders, single-family home buildings experienced negative growth rates in all submarkets in the second quarter of 2023, and the same goes for multifamily production.
As we know, areas where people are retired or are parts of other demographics could play a part in people building houses. And, as mentioned, industry impacts also affect building as well. Over the past year or so, housing starts have remained relatively the same.
From the topography of a piece of land, air or water quality, and climate, environmental factors play a huge role in whether someone can build a residential structure.
The Significance of Housing Starts
Housing starts play a crucial role in society. Not only do housing starts impact the economy, they also play a role in employment and the housing market.
For the economy, it’s all about growth. If housing starts to decline, the economy could very well go into a recession. If housing starts to increase, the economy is on track for growth.
If housing starts to increase, the economy is likely growing. And with growth comes the need for additional employees.
The effects on the housing market
When housing starts remain relatively steady, that is a sign the market is on track. Overall, the growth of houses, especially new houses, helps add value to the home around the area, but also helps increase overall market value in the long run. And when housing starts are on the up and up, it’s likely a time when folks are looking to invest in a property.
Housing starts and real estate investments
If housing starts are increasing, so are real estate investments—which, if you think about it, only makes sense. The more people break ground, the more likely that people are investing in property to keep the flow going.
Housing Starts Data & Statistics
As a whole, housing starts increased by 3.9% to a rate of 1.452 million units in July 2023. Often, housing starts are subject to big seasonal variations.
The data is gathered by the Census Bureau, which estimates housing starts from a representative sample of building permits issued by a sample of local building permit offices and then keeps track of those projects through completion and sale.
As for sampling error, the monthly report provides error margins representing 90% confidence intervals for month-to-month and year-over-year changes.
Why Housing Starts Matter for Investors
Housing starts are a hot commodity amongst investors. Every month, data is compared to the previous months and years. Sure, housing starts can be impacted by things as simple as weather, but keep in mind that the numbers are also seasonally adjusted and smoothed using statistical formulas. The housing starts data are often revised to reflect the most current evaluations.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.