Long Term Perspective

Income and interest rates are the two key factors that affect housing activity. More housing construction translates into increased demand for furniture and appliances as consumers refurnish their new homes. In the current business cycle, housing construction appears to have peaked in 2005 even as interest rates began to head higher. Starts were sharply lower in 2006 and 2007 in response to higher mortgage rates and unsold housing inventories.  Tighter lending standards and the credit crunch helped push starts lower in the second half of 2007 and that trend continued into early 2009.  A thawing in mortgage markets and an improved economic outlooks helped starts stabilize in 2009.  Two rounds of special tax credits also boosted home sales in the summer and autumn of 2009 and spring 2010, leading to an incremental rise in starts during early 2010.  During latter 2010, starts edged down on heavy supply of new homes and lackluster sales.  Starts showed mild improvement in 2011 but remained at anemic levels. Gradual sell-off of housing inventory led to modest improvement in starts in the first half of 2012.

Short Term Perspective

Builders are adding to the pace of construction.  Starts in October rose 3.6 percent to an annual pace of 894,000. This followed a giant 15.1 percent revised surge in September and a 3.0 percent gain in August. October's gain is centered in the West and Midwest with the South posting a small decline and the Northeast, which was hit by Hurricane Sandy at month end, posting a sizable decline. Yet the Commerce Department said the effect of the hurricane on October's results was minimal.

Showing less strength in the month were permits which fell 2.7 percent to an annual pace of 866,000. But this followed an 11.1 percent surge in September. The October dip aside, permits have been trending sharply higher in line with starts.