Housing Starts: An Important Metric for Real Estate Investors

What Are Housing Starts?

The term housing starts refers to the start of construction on a new residential housing unit.

Because new housing is a big-ticket capital good that spurs additional consumer spending on appliances and furniture, it is a key economic indicator closely watched by financial markets participants.

The U.S. Census Bureau publishes estimates of U.S. housing starts on the 12th business day of each month based on a survey of homebuilders partially funded by the U.S. Department of Housing and Urban Development. The New Residential Construction report also includes housing completions data as well as a count of building permits derived from a separate survey of building permit offices.

Understanding Housing Starts

Housing is a key sector of the U.S. economy, and a crucial one for the banking, construction, and real estate industries. The health of the housing sector is also an important factor in employment as well as the price of commodities including lumber and copper.

Housing starts measure builders' willingness to expend resources on new projects, which in turn depends on their estimates of housing demand, so the trend in starts can also offer insights into risk appetite and consumer sentiment.

Because housing starts in parts of the U.S. are subject to big seasonal variations, the headline number in the monthly report is a seasonally adjusted annual rate, which adjusts the monthly total based on that seasonal factor and then calculates the annual starts rate at that pace.

Short-term weather disruptions such as storms or cold snaps can also have an effect on this volatile data series. The Census Bureau notes month-to-month changes in seasonally adjusted data can be irregular, and estimates it takes six months to establish the underlying rate for housing starts.

The report breaks out the national housing starts data by four U.S. regions: Northeast, Midwest, South, and West.

What Counts as a Housing Start

A housing start denotes groundbreaking, or excavation, for a home's foundation or footing. The monthly data is divided into three housing categories:

• Single-family homes
• Multi-family housing of two to four units
• Multi-family housing with five or more units, such as apartment buildings

Data for single-family homes and multi-family housing with five or more units is provided on a seasonally adjusted as well as unadjusted basis, while that for multi-family housing with two to four units is provided only on an unadjusted basis.

Every unit in multi-family housing counts as a separate start, so the start of construction for an apartment building with 25 units would register as 25 new multi-family housing starts.

The New Residential Construction report measures starts for privately-owned housing, including units started by private developers for sale to local public housing authorities upon completion. Housing unit statistics exclude group quarters such as dormitories and rooming houses.

How the Housing Starts Data Is Gathered

The Census Bureau estimates housing starts from a representative sample of building permits issued by a sample of local permitting offices, then tracks those projects through completion and sale.

The survey counts all housing starts with five or more units, but samples only about 2% of nationwide starts for housing with one to four units.

To account for sampling error among others, the monthly report provides error margins representing 90% confidence intervals for month-to-month and year-over-year changes.

For example, the initially reported 1.7% decline in single-family housing starts in March 2022 from the prior month had 90% confidence interval, or error margin, of plus or minus 12.3%, while the 4.4% decline for the same category from a year earlier had an error margin of 8.3%.

The Bottom Line

Housing is a key sector of the U.S. economy and the monthly housing starts report is a closely watched measure of its health. The month-to-month numbers are volatile and subject to large error margins, so it takes months of data to establish the underlying trend.