U.S. Housing Starts Report

Mar. 7, 2007 (Action Economics delivered by Newstex) -- Action Bullets

February housing starts are expected to rebound 10.1% to a 1.55 mln unit pace

Weather distortions in January were considerable, with the impact seen across starts, construction spending and new and existing home sales reports.

The storm-infested month of February looks like to reveal an even more pronounced weather-effect, making it difficult to gage the underlying trend in housing.

Despite a better run of MBA mortgage data, the cold snap in the Northeast and the subprime mortgage sector woes could cloud upcoming readings on the housing sector.

Aggregate hours from the February employment report will help to hone the forecast.

Residential construction restrained overall GDP growth in the five quarters through Q4, marking the worst performance since 1989-1991.

Construction is expected to exert a drag on Q1 GDP growth, as we currently project a 22% rate of decline in residential construction in .

Market ActionTreasuries benefited from the big housing slowdown in Q2 and Q3. The emergence of some stability in the housing sector in Q4 unwound some of the richness in the Treasury market. However, renewed uncertainty in January benefited Treasuries.

The dollar has gotten some support in 2007, as Fed easing risk continues to get scaled back. This report should not change that view.

The Big PictureFebruary housing starts are expected to rebound 10.1% to a 1.55 mln unit pace. Weather distortions in January were considerable, with the impact seen across starts, construction spending and new and existing home sales reports. The storm-infested month of February looks like to reveal an even more pronounced weather-effect, making it difficult to gage the underlying trend in housing. Aggregate hours from the February employment report will help to hone the forecast.

Residential construction has restrained overall GDP growth in the five quarters through Q4 of 2006. This is the worst performance since 1989-1991, when residential construction contracted in eight of the nine quarters from Q1 1989 to Q1 1991. Construction is expected to again exert a drag on GDP growth in Q1, as we currently project a 22% rate of decline in residential construction in after the 19.1% contraction in Q4. Although we expect an eventual stabilization in most real estate indicators by mid-year, the production sequence of starts, construction, and completions should be restrained by downward ripple-through effects through mid-2007, as the sector digests the inventory overhang.

Inside the NumbersRelationship of Starts and Permits Permits are watched as a leading indicator for housing construction, as it is the earliest stage in the pipeline for the building process. A considerably stronger reading on January permits relative to starts is supportive of a recovery in starts over the coming months.

More generally, permits underperformed starts in the early 1990s, but permit growth consistently outpaced starts in every year between 1992 and 2002. The faster growth for permits left the level of permits above starts, on net, in each year since 1999. The gap reached a maximum of 297k units in 2004, before the pattern started to reverse.

In 2006, permit and starts growth were roughly in-synch, with just a 17k unit gap for the year, on average. The permits data and starts data pertain to slightly different population groups that have also changed over time with adjustments to the housing starts report, so the time-series relationship has a degree of drift.

Implications of NAHB Survey The NAHB survey tends to provide an amplified sentiment reading of the housing industry. The free-fall in the NAHB survey through September of 2006 appears to have been an exaggeration of the swing that occurred in the actual housing statistics, as current sentiment was likely further depressed by weak stock prices for the homebuilding sector.