Housing Starts Plunge: Harmful or Healthy?

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 |  Includes: IYR, XHB
by: Wall St. Cheat Sheet

The housing supply glut is one of the huge speed-bumps in the real estate market. Are reduced housing starts (SPDR Homebuilders ETF (NYSEARCA:XHB)) a sign we’re flushing out the overhang, or are they a more important sign of a weak consumer?

This morning, the US Census Bureau said October’s housing starts were the least amount in 18 months:

Building Permits

Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 550,000. This is 0.5 percent (±3.0%)* above the revised September rate of 547,000, but is 4.5 percent (±3.1%) below the October 2009 estimate of 576,000. Single-family authorizations in October were at a rate of 406,000; this is 1.0 percent (±1.3%)* above the revised September figure of 402,000. Authorizations of units in buildings with five units or more were at a rate of 121,000 in October.

Housing Starts

Privately-owned housing starts in October were at a seasonally adjusted annual rate of 519,000. This is 11.7 percent (±8.6%) below the Privately-owned housing starts in October were at a seasonally adjusted annual rate of 519,000. This is 11.7 percent (±8.6%) below the revised September estimate of 588,000 and is 1.9 percent (±9.6%)* below the October 2009 rate of 529,000. Single-family housing starts in October were at a rate of 436,000; this is 1.1 percent (±8.6%)* below the revised September figure of 441,000. The October rate for units in buildings with five units or more was 74,000.

Housing Completions

Privately-owned housing completions in October were at a seasonally adjusted annual rate of 613,000. This is 3.2 percent (±15.3%)* below the revised September estimate of 633,000 and is 18.4 percent (±11.4%) below the October 2009 rate of 751,000. Single-family housing completions in October were at a rate of 501,000; this is 2.7 percent (±16.8%)* above the revised September rate of 488,000. The October rate for units in buildings with five units or more was 107,000.

* 90% confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero.

Paradoxically, less construction is both good and bad. We all know increasing the housing supply will only bring down the value of our current abodes. But at the same time, construction is one of the strongest economic boosters know to humankind.

Given that we’re still learning why it’s a bad idea to have artificial housing activity no matter the short term gain, I like seeing us work through housing supply at this point in the real estate (iShares Dow Jones US Real Estate ETF (NYSEARCA:IYR)) cycle.

Disclosure: No positions