Housing Starts: A Guided Tour for Investors

Housing data can be a good economic and investing proxy beyond demand for big yellow excavators.

Swings in the month-over-month change for construction starts and property resales tend to drive housing and economic-sensitive stock prices in the short term. But housing reports are layered with figures that can inform investors beyond those quick hits. This might include what pockets of the home market (apartments versus single-family?) and which locales (Atlanta or Cleveland?) are standouts or laggards.

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Sometimes the details within a single report diverge, which can be especially telling for investors trying to get a read on what's to come. Take May 2012 data (released in June): May housing starts fell 4.8 percent compared to April--a bearish news flash. A second look showed starts were up more than 28 percent from where they stood a year earlier. But the real attention-getter that month? Building permits. They rose to levels not seen in more than 3 1/2 years. Permits tend to lead starts by around three to four months.

Let's take a quick tour of the government's monthly "housing starts" report and its potential impact on your portfolio.

Formal introduction. The New Residential Construction Report is this report's real name; it's usually referred to as "housing starts." It's released by the U.S. Commerce Department on or around the 17th of each month, at 8:30 a.m. EST, and covers the previous month (June's mid-month release covers May, and so on.) The report includes building permits (tracking legal permission to dig, usually about a three-four month lead), housing starts (records of foundations poured), and housing completions (typically a lightly followed figure on its own given the variance in project length, although a contributor to the overall economic picture). The report is compiled through surveys of homebuilders nationwide.

Headline housing starts. So what can housing starts tell us? There's the financing behind the deals, for one; stronger starts must mean a pick-up in bank traffic, right? Then there are the details that follow the deals--excited homeowners will rush out to buy new furniture and lawnmowers. Just as much investing intelligence can be gleaned from weak data as from strong figures. Think of the potential boost to big-box home-repair retailers when frustrated homeowners ride out a weak selling market by staying put.

Starts are used to predict the residential investment portion of gross domestic product, the broadest measure of economic performance.

The monthly report, a national aggregate, divides the data according to building types (single-family homes, two-to-four resident units, and five-or-more resident units). Single-family starts typically account for roughly 74 percent of all starts. Multifamily units make up the rest.

[See Traditional 'Rules' of Home Buying Return.]

Investment likely to be affected: SPDR S&P Homebuilders ETF (symbol: XHB). XHB, trading near 21.89, has nearly doubled off its 52-week low of $12.22. ETFs tend to move in the short-term with headline figures. Also sensitive: The Home Depot (HD) and Lowe's Cos. (LOW).

Although he's increasingly bullish on building prospects, National Association of Home Builders Senior Economist Robert Denk said in a webcast that "caveats like tight lending standards and foreclosures could be a drag."

That's why some financial-sector analysts remain more optimistic for regional banking names, suggesting their lending spigots are looser and they're more nimble when it comes to responding to housing trends. Overall financial-sector volatility could persist. Some regional banks for consideration: Fifth Third Bancorp (FITB), M&T Bank Corporation (MTB), and PNC Financial Services Group (PNC).

Building permits. "The key numbers in this report are the housing permits--not the starts. The permits are better measured than starts, are less influenced by weather and are forward looking," say analysts at IHS Global Insight, in a report.

Permits, given their forward-looking ability, are helpful in multiple ways; they're included in leading economic indicators data issued by the Conference Board, for instance.

Tracking trends here is important. Remember the May jump in the earlier example? Permits for new housing fell 3.7 percent in June, but the more volatile multifamily segment was the culprit; a closer look reveals permits for single-family homes rose that month. Arguably, single-family building permits are the most important number within this report.

Investment likely to be affected: Manufacturers and distributors of building materials, such as USG Corp. (USG) and Eagle Materials (EXP), which makes gypsum wallboard and cement.

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Single-family starts. This is most reliable figure since it gauges true consumer confidence, whereas multifamily units are driven more by speculative investment.

Take the May example, where the headline figure and building permits diverged; a drop of multifamily housing starts to an annual rate of 179,000 from 217,000 in April accounted for the loss in new construction. Starts of single family homes rose 3.2 percent month-over-month to a 516,000 annual rate.

Perhaps most helpful for investors is drilling down on the details: For instance, in July, single-family permits in the West reached their highest level since August 2008.

Investment likely to be affected: Community development builders that span mid-market pricing to upper-end pricing, including: D.R. Horton Inc. (DHI), Lennar Corp. (LEN), and Toll Brothers, Inc. (TOL).

Multifamily measure. It's volatile, sure, but it still tells a story. During the recession, foreclosures boosted demand for rental property. The country's largest East and West Coast metros dominate the market, but trends in urban migration may be changing some with an aging baby boomer population.

Investment likely to be affected: Real Estate Investment Trusts (REITs) focused on apartment buildings can be a diverse way to add some real estate exposure, with stock-like characteristics, to a portfolio. Among the names: Mid-America Apartments (MAA), AvalonBay (AVB), and Essex Property Trust (ESS). Some include high-end properties, such as Equity Residential (EQR).

Think location. Housing starts data is divided into four geographical areas of the country, which gives a better sense of the differences in economic conditions for each; the regions often show a different rate of change each month and sometimes there is divergence, with some areas improving and some dropping.

Investment likely to be affected: Camden Property Trust (CPT) is an apartment REIT concentrated in the Houston region, for instance. So, if an investor was optimistic for continued growth in the metropolitan area, he or she might hone in on this region-specific play. Not so big on Texas? Explore REITs specific to other regions.

No matter what category you opt to give a closer look, keep in mind the monthly volatility in this report. For example, overall housing permits fell 3.7 percent in June due largely to a sharp drop in multifamily permits in the South, a giveback from a stronger reading in May. Such readings should prompt you to put added emphasis on monthly trends, not just change. Exploiting a short-term reactionary move in a stock or ETF may allow you to add to a position that supports your longer-horizon stance.