• INDICATOR: October Housing Starts
• KEY DATA: Starts: -11%; 1-Family: -2.4%; Multi-Family: -25.1%/ Permits: +4.1%; 1-Family: +2.4%; Multi-Family: +6.8%
• IN A NUTSHELL:  “Home construction has been up, down and all over the place this year, but the trend is still upward, at least slowly.”

WHAT IT MEANS:  The curse of this expansion is that the moderate pace has meant the economic data bounce around like crazy.  That has been the case with the construction data and we saw that once again with the latest housing starts numbers. 

And once again, the headline number hid what was happening.  On the surface, it appears that builders slowed their pace of construction in October, but let’s go to the details.  Single-family construction eased only modestly.  The big decline was in multi-family activity and if there is one thing we know, that component is the epitome of volatility.  Indeed, the huge October drop came after a robust 18% rise in October. 

Over the past year, multi-family starts have ranged from a low of 300,000 units annualized in February to a high of 524,000 units in June – and these are seasonally adjusted numbers!  So, let’s not take too much from the October decline in starts.  Will construction pick up?  The October permit requests were about 8.5% above the starts number and for the past three months, permits have been running a little ahead of the building pace, so don’t be surprised if housing activity rebounds solidly in November. 

And if the strong rise in the Mortgage Bankers Association’s mortgage applications numbers are any indicator of demand, that should happen.  Purchase mortgage applications are running about 15% above last year’s levels.  Builders should see their fair share of that new demand.

MARKETS AND FED POLICY IMPLICATIONS:  Housing is a key sector in the economy and housing sales and starts are still improving.  They may not be where most of us would like to see them, but there are factors at work that may be constraining home demand.  Housing formation is a major factor in sales and that has been lagging.  Younger workers are burdened by high school loan payments.  Boomers are bailing out of their homes and may not be looking for new product. 

Simply imposing past trends on current patterns without making adjustments for changing conditions may not shed a whole lot of light on the state of the housing market. While housing sales and starts may be below desired levels, they may not be that bad if the demographic trends are factored in.  That is similar to the situation with the labor force participation rate.  Failing to recognize that changing demographics are affecting the labor supply allows people to complain about the decline in the participation rate. 

But it could be that given the demographic trends and the changing structure of the job market, the decline may not be far from what would have been expected. And that goes for economic growth as well.  We would all love to see 4% or even 5% growth.  However, trend growth has fallen to less than 2.5%, so those robust growth rates are not likely to be seen.

The Fed members understand this and that is why they are likely to believe the economy is currently strong enough to absorb a rate hike fairly easily.