What Are Housing Starts?
Housing Starts refer to the number of residential building permits that have been issued for construction of new homes. The number of housing starts is considered to be an indicator of construction activity. Construction activity is highly sensitive to the business cycle. In particular, housing starts will increase as interest rates decline, as consumer confidence rises, as unemployment rates fall, and as real disposable personal income rises. Because residential building permits are so sensitive to interest rates and other cyclical economic factors, housing starts are a volatile data series and are useful as an indicator of change in the business cycle. The typical decline in interest rates during a recession reduces the cost of borrowing for households and businesses, and thus construction activity is usually an important early contributor to economic recoveries following recessions. Likewise if economic growth during the peak of the business cycle pushes up inflation, then the resulting rise in nominal interest rates will tend to reduce construction activity. Consequently a decline in construction activity may be one of the first indicators of a recession. For these reasons the Conference Board includes housing starts as an element of the Index of Leading Economic Indicators.
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