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Housing Starts Not Scared of Inflation

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Wednesday, January 19, 2022

We’ve done plenty of hand-wringing already this year about increasing inflation and rising interest rates doing damage to the growth we’ve seen in the economy for the past year-plus. Small-caps are already basically in correction territory, and the Nasdaq isn’t too far behind. The Dow and the S&P 500 are looking to break three-day losing streaks after recently notching all-time closing highs.

A rather lackluster start to Q4 earnings among the first major sector to report en masse — the big Wall Street banks — along with 10-year and 2-year Treasury yields on the rise to their highest levels since 2019 have joined to form a bearish dark cloud over the markets of the past couple weeks. This morning’s pre-market is filling in some gaps — the Dow and Nasdaq +100 points ahead of the bell, with the S&P +20, but the Nasdaq remains below its 200-day moving average for the first time since April 2020.

One sector clearly not feeling bothered by rising inflation/interest rates are Housing Starts and Building Permits for December, which far outperformed expectations and leaped to highs not seen since March of 2020. Housing Starts reached 1.702 million last month, above the 1.65 million expected and vaulting past the 1.678 million posted the previous month, which itself was a +12% month over month jump.

Building Permits, a proxy for future starts, posted an even more impressive positive surprise this morning: 1.873 million for December, well ahead of the 1.71 million analysts were looking for and the 1.717 million posted for November. This is a month-over-month jump of +9.1% — in an environment that was supposedly seeing a glut in permits as starts had been delayed by higher input costs due to inflation.

Interest rate levels may be having an effect on these numbers, however; home-buyers are likely aware of the coming mortgage-rate hikes that will join interest rate increases once the Fed decides to implement them (we’re still a couple months away from tapering the rest of the asset purchase program), and are perhaps pulling new home creation into December from the early months of 2022. It will take a couple month’s worth of data from now to see if this is indeed the case, but it’s worth considering.

That said, housing formation is incredibly important for a robust economy, and from this perspective, housing is indeed pulling its weight. Not only by way of high-price-point purchases (a house or condo almost always costs more than an automobile), but because new home builds bring families in existing houses to them, those existing houses are then taken up by families in apartments or starter homes, leaving these units open for new entries into the home-buying market (looking at you, Millennials).

As such, these are very good numbers to hang one’s hat on a continuing robust economy in 2022. Just as we saw a year ago with the start of the Great Reopening, there will be fits and starts along the way, but ultimately we see these growth figures all pointing in the right direction.

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