New home starts dipped 5.4%, led by single family starts down 6.0%.

Total starts came in at 1.142 million (SAAR), well under the consensus estimate of 1.190 million, and beneath the entire Econoday Range of 1.170 million to 1.220 million.

Nonetheless the Econoday robot said the “details are not as weak as the headlines”. Let’s investigate the claim.

Highlights

The details are not as weak as the headlines as the new home market remains one of the positives for the economy. Housing starts and permits did fall in August, down a sharp 5.4 percent for starts to a lower-than-expected 1.142 million annualized rate and down 0.4 percent for permits to 1.139 million which is also lower than expected. But permit growth for single-family homes, which is a key indication on housing demand, rose a very solid 3.7 percent to a 737,000 rate which is about where permits were trending earlier in the year.

But the nearer term outlook is less positive as starts for single-family homes fell 6.0 percent to 722,000. Multi-family starts also show weakness, down 5.4 percent to 420,000 and with permits down 7.2 percent to 402,000. The permit dip pulls the year-on-year reading for multi-family homes deep into the negative column at minus 11.8 percent though starts for multi-family homes are still positive, at least for now at plus 4.7 percent. A positive in the report and reflecting the general strength in prior starts is a 0.9 percent rise in total homes under construction to a new cycle high at 1.038 million.

The strength for single-family permits, which in contrast to the once high-flying and lower cost multi-family category, is a solid plus for residential construction. New home sales data for August will be posted on Monday of next week.

Permits a Leading Indicator of What?

Housing starts are a leading indicator of future economic growth. Builders do not normally build on spec, so in general, a housing start represents a sale. With that comes cabinets, landscaping, appliances, moving expenses, shipping, and even food for all the builders and trades involved.

Permits are allegedly a leading indicator of a leading indicator. But unlike new home starts that typically have an associated contract, permits are bought on spec. They have to be. It takes a permit to build a home.

In reality, permits are simply an indicator of builder sentiment. Yes, it takes a permit to build a home, but it also takes a buyer to build a home. At turning points, builders will have a lot of money tied up in land, for homes that will not be built.

Housing Starts

Housing Starts Percent Change From Year Ago

Single Unit Housing Starts

Single Unit Housing Starts Percent Change From Year Ago

Mike “Mish” Shedlock