Housing Starts And Building Permits

Why is it important?

The number of new home constructions and construction permits authorized within a given period is a positive show of economic growth. When the population has very little money at their disposal to spend, it is very unlikely to find people buying homes. Even mortgages become difficult to service. Since most constructions are funded by financial institutions like banks. These institutions have dynamic interest rates charged on loans. The interest rates are largely determined by the economic growths in relation to demand versus supply of the loans. When lending rates come down it clearly, shows that the banks have much cash in their reserves that they are eager to introduce into circulation.

Many a times, the money introduced into the economy by the banks are an indicator that the banks are quite confident of the economic trends in the near future and are thus not risk averse. This attitude influences lenders in the same way and the economy thus takes a positive pace at growth. The introduction of several constructions always shows that companies are willing to setup long time investments, this act as great economic indicators on the economic situation at any given point in time.

It can clearly show the status of companies dealing in construction related materials such as cement, nails, roofing materials, and others. The companies can also project their orders of manufacture depending on this data. The number of permits can help the companies in estimating the amount of cement that may be required in the market in the coming weeks and help them in adjusting their productions accordingly. The construction companies may also use the same statistics to project on the labor force, thus whether to hire more or lay off some in accordance with the anticipation they get from the authorizations.

How is it computed?

The U.S. Bureau of census has systems in place that coordinates with the local building permit officials to compile and submit results regarding any new permits it has issued on a monthly basis. This enables the bureau to keep track of all impending new constructions and can even categorize them accordingly simply because when issuing the permits, the officials fill all the details regarding the structure. There is also the McGraw-Hill Construction Dodge that is in charge of overseeing and evaluating the cost of all construction contracts. The Residential Construction series gives the value of contracts for one- and two-family houses, apartment buildings, hotels, motels, and dormitories. Nonresidential Building Construction includes commercial buildings, manufacturing plants, hospitals, schools and colleges, and other public and private buildings. Non-building Construction refers to projects such as highways, bridges, dams, utility systems, and airports. All the information from these sources are compiled and used to arrive at the detailed statistics as regards any new structures.

What is its impact on forex?

The mushrooming of new structures means a liquid economy. This practically means that there is much money in circulation. The impact of much money in circulation always means higher prices for commodities, which lead to high inflation rate. Judging on this the Federal Reserve bank may try to contain the situation by reducing the amount of money in circulation. However if the companies investing in the construction of the new homes is foreign it automatically means an increase in foreign currency being sold in exchange for the local currency. This means that the local currency will be quite in demand on the forex a trend that automatically translates into good selling prices for the currency. The federal bank will be enjoying the increase in the currency value and may want to maintain the pace as it is.

If very few people are seeking permits for new constructions, the government can use this information to find out why, it might mean that the demand for housing has reduced drastically or people are simply not liquid enough to invest in long term projects such as housing. This may help the federal bank in deciding whether to reduce the lending rates in order to influence more constructions. This should however be done after knowing whether the demand for the houses is still existent or not. It could as well indicate that most people are relocating to other places, a factor that could spell doom for the forex in the long term since with the exit of most people the value of the local currency will drop due to the decrease in its demand.

How does it affect the stock market?

Although the number of housing starts and new permits may not directly affect the entire stock market in a big way, it is important to note that it would lead to investors trying to shift their money from seemingly dormant sectors to ones that are more promising. Take the situation of very few constructions being authorized. The investors in the building and construction companies and companies that manufacture building materials such as cement and roofing materials would be looking forward to a very low season this will mean no profits from such sectors, as they are likely to make no sales. Smart investors with this knowledge would not hesitate to sell their shares in the said companies and take it elsewhere. A very low number of permits will also influence the employment rates in the construction industry with possible layoffs of employees in the industry. When the market anticipates many new housing starts, the investors would again shift back to the construction related stocks. This movement of investors from and to the stocks of the construction industry related companies would no doubt also dictate the rise and fall of the shares of the companies in question. A stock trader who can get this information can make good turnovers if he manages the information well.

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