What are housing starts and why should you care?

Just last week, government issued the housing starts report for December and it was pretty good news. If you listen to talk radio or watch any financial news program on cable, one day a month they talk about housing starts and then you don’t hear much about it. The problem is that nobody bothers to tell you exactly what the term means and why it’s important.

The federal government tracks housing starts and issues the information, usually in the third week of the month. These statistics come from the Census Bureau, which is part of the Department of Commerce and from the Department of Housing and Urban Development (HUD).

The government reports the number of scheduled construction projects of new houses or apartment buildings across the country. That’s housing starts, in a nutshell. Like unemployment rates, economic growth, and consumer confidence statistics, it is used as an indicator of how the economy is doing.

The ripple effects on the economy

The housing market is one of the most vital aspects of the U.S. economy. Many analysts believe that there may be no better indication of how the housing market is doing than housing starts.

If a report comes out showing that housing starts are up, it's a good sign for the economy. There are usually ripple effects in the stock market as consumers invest, which increases the value of stocks and corporate profits. If the report says housing starts are down, investors tend to get tight-fisted.

Housing starts are an indicator of the commitment of builders to new construction. When new construction is up, more people will be employed to build those houses and apartment buildings. It also means that the people who buy those homes or move into a new apartment will be purchasing big ticket items such as furniture and appliances. These are often referred to as durable goods and are yet another economic statistic you may hear reported.

How to look at housing starts

Because construction is seasonal and subject to weather, housing start numbers tend to be volatile. One down month doesn’t mean you should take it as an indication that the economy is tanking. To identify a trend, look at a six-month period of housing starts to get a more accurate indication of what the market is doing. You should also do a year-over-year comparison.

Remember also that we’re dealing with government numbers here. Like every other report it issues, housing start figures are subject to revisions up or down. Those revisions come out within two months of the original report and are very rarely reported in the news. The change can be significant.