Housing Starts And The Economic Cycle

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Includes: CLAW, HOML, ITB, IYR, NAIL, PKB, XHB
by: Bespoke Investment Group

Wednesday's data on Housing Starts and Building Permits disappointed consensus expectations, and while some of the declines can be chalked up to the hurricanes in the South, we would note that Starts in both the Northeast and Midwest regions also showed declines. One silver lining to this month's data was that in both the cases of Housing Starts and Building Permits, the majority of the weakness was in multi-family units, which tend to be more volatile.

Residential construction is a big part of the US economy, so naturally, an uptick or slowdown in activity is going to have an impact on the business cycle. The chart below compares historical levels of Housing Starts on a 12-month average basis to expansions and recessions since 1967. It's pretty easy to see in the chart that peaks in Housing Starts tend to occur late in the cycle, while troughs are formed right after the recession ends. What's important to note, however, is that even after the peak level of Housing Starts for a given cycle, a recession doesn't usually begin for at least another year.

So where do things stand right now with Housing Starts? Even after this month's data, the 12-month moving average of Housing starts actually ticked higher in September, rising from 1.199 million up to 1.204 million. That's the highest level since March 2008. While that's definitely a positive data point, we would also note that barring a major improvement in the data over the coming months, we have likely seen a short-term peak in this reading, as the 12-month average will be dropping average monthly readings of 1.243 million for the next six months.

Taking a look at a shorter-term window, the chart below shows the 12-month moving average of Housing Starts and Building Permits going back to 2010. Here it's a little bit easier to see the most recent uptick in Housing Starts, but at the same time, the 12-month moving average of Building Permits has already started to tick lower. As is the case with Housing Starts, barring an imminent uptick in activity, this 12-month moving average will continue to decline in the months ahead.