Political Cortex: Brain Food for the Body Politic

Housing Starts rose 5.9% to a seasonally adjusted annual rate of 1,772,000 -- stronger than the market players expected!

Building permits dropped 6.3% to a seasonally adjusted annual rate of 1,619,000

Housing completions rose 11.1% to a seasonally adjusted annual rate of 2,084,000

The initial market reaction to these numbers was quite positive -- probably because most market participants tend to focus most heavily on housing starts -- believing that a higher number of starts necessarily means a stronger demand for new housing. Taken alone, the housing starts suggested housing sector strength.

Now here is the kick. There is a fundamental dynamic here that I believe is being overlooked.

Sure the housing starts are looking pretty strong for the moment, but look at the other numbers and consider their relationship with one another.

Permits dropped precipitously once again -- and are running well below housing starts. At the same time, housing starts and housing permits are currently running well below housing completions.

The rapid rise in completions (now almost 30% above permits) means that a massive number of projects are being completed while a much smaller number of projects are being started. This indicates a SLOWING housing market -- one that will inevitably lead to near-term, large layoffs in the housing industry.

So the surge in housing completions likely explains the rise in housing starts. Completions free up the resources (employees, machinery, etc.) of housing firms -- which in turn need to focus their newly available resources on any available projects. Thus with resources being released increasingly rapidly as projects are completed, starts are rising as a result.

The Bottom Line: Data confirm that, at least in terms of housing industry activity (if not sale prices), the worst from the housing sector is just beginning.