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Why Housing Starts Are Used As an Economic Indicator

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Government and independent economists use a minimum of 12 economic indicators to help them determine how the U.S. economy is doing. Among these indicators is something known as ‘housing starts’. Housing starts are a verifiable statistic that measures the difference between the number of building permits issued and the actual number of houses being built during a given period. Housing start statistics are always released with a comparison of the previous month in order to track up-and-down trends.

As an economic indicator, housing starts data clearly show the American consumer’s willingness to invest in new housing as compared to existing housing. As such, an increase in the number of new homes being built reflects positive consumer confidence by way of a willingness to spend more money on a long-term mortgage. As you might expect, housing starts typically increase during a strong economy and decrease during economic weakness.

Implications for the Greater Economy

Housing starts are a good indication of economic health just from the consumer confidence standpoint alone. However, economists look even deeper than that. Consider the fact that new home construction affects a significant number of other areas well, including the following:

  • mortgage lending
  • homeowners insurance
  • building and construction supplies
  • architecture, landscaping, design.Â 

Any time the construction industry is enjoying strong performance, a number of other sectors benefit alongside it. Having said that, housing starts alone are not an indication of economic health. That is because the statistics are affected by everything from the weather to supply problems. The Government must use certain statistical formulas to account for seasonal changes and other factors that might unduly influence housing starts. As such, there is no exact science here.

We generally accept positive housing start numbers as a positive economic indicator overall. When combined with the other 11 indicators used by economists, housing starts can show us the strength of the economy, how consumers perceive it, and the short-term picture of what can be expected over the next 6 to 12 months.

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