Housing starts are a leading economic indicator because they are so sensitive to interest rates and other cyclical economic variables. A rise in interest rates raises the cost of borrowing for both households and businesses, and thus when interest rates rise housing starts will react by declining. Conversely a drop in interest rates will cause housing starts to increase.

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Households usually must borrow to finance purchases of relatively expensive consumer durable goods such as homes. Because interest rates are the cost of borrowing, they are a non-price factor that causes the demand for homes to shift. Thus a rise in interest rates will reduce demand for homes, which will be reflected in a decline in housing starts.

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Many of the inputs used in home construction, such as labor and lumber, are purchased in near-perfectly competitive resource markets. In these markets resources are homogeneous in quality, entry is relatively low-cost, and there are many buyers and sellers, each small in size relative to the overall market.

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A rise in housing starts occurs when the demand for new housing increases. Many resources serve as inputs in the construction of new residential housing, and a rise in the demand for new housing will generate a proportionate rise in the derived demand for construction inputs. Because of the cyclical nature of residential construction, the resource markets that serve as inputs to the residential construction industry are also highly cyclical, and can experience wide swings in demand throughout the business cycle.

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Housing starts serve as an indicator of labor demand for the various residential construction trades such as laborers, carpenters, painters, masons, plumbers, and electricians. Because of the cyclical nature of residential construction, the labor markets for the various construction trades are also highly cyclical, and workers can experience wide swings in demand throughout the business cycle.

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An increase in housing starts indicates that the demand for new housing has increased. If the increase in housing demand is spurred by an economy-wide factor such as a decline in interest rates, then aggregate demand will increase due to an economy-wide increase in demand for new housing.

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Housing starts are a leading indicator of output in the economy. A rise in residential building permits indicates future construction activity and an increased production of new homes. New homes are included in GDP.

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Housing starts are a leading indicator of output in the economy. A rise in residential building permits indicates future construction activity and an increased production of new homes. New homes are included in GDP.

Review other EconData for this subject, or visit additional resources:

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