Home Building Term Paper

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Housing Starts

The term Housing Starts refers to an economic indicator of statistical data associated with the number of public and private single family dwellings and multi-family dwellings which are begun during a certain period. Single family dwellings, which have begun the foundation digging process constitute one housing start while multi-family dwellings is equivalent to the number of units or single family dwellings constructed in a given building. Additionally, in 1992 the U.S. Census Bureau began including a housing start number for every dwelling in which an entirely new constructed dwelling or set of dwellings would be constructed on an old foundation. The statistic does not include, remodels, additions or commercial buildings being converted to homes. Housing Starts are considered a leading indicator of the economy as a whole, because it is a direct indicator of issues of supply and demand. (A.G. Raymond & Co., 2004, "Statistics and Economic Indicators" (http://www.raymondnet.com/AGRCo-WebPages/MainPage/statistics-main.htm)

As with most economic issues and indicators there is often a period of time when organizations and businesses rely not on past statistics but forecast statistics for the period they must plan for. It is for this reason that economists must be very careful of the outcomes of their forecasting. For housing starts these forecasts usually indicate a period into the future by six months. According to the Financial Forecast Center, the housing starts forecast for the next six months are as follows:

Total New Privately Owned Housing Units Started SAAR Thousand Units.

Jul

2004

Aug

2004

Sep

2004

Oct

2004

Nov

2004

Dec

2004

Value 2,087 2,109 1,856 1,413 1,550 2,378

Standard Deviation

Correlation Coefficient

Updated Tuesday, July 13, 2004 http://www.forecasts.org/house.htm

Additionally the Financial Forecast Center has developed a graph of the immediate past and immediate future, which can also be viewed:

U.S. Housing Starts Past Present and http://marketvector.com/leading-indicator/images/house.gif http://www.forecasts.org/house.htm

The Financial Forecast Center uses what they claim is a state of the art computer model for the development of forecast statistics (called "neural network"). This system works in such away that it uses much less information form humans, who are inherent in the skewing of statistics based on many factors, including preconceptions and biases. (FFC, 2004, "Forecast Technology" (http://www.forecasts.org/info/tech.htm) In this system there is a multifaceted set of statistics that enable the determination of indicator forecasts, such as the housing starts forecast. The multi-faceted set of data includes but is not limited to this list of data sets offered by the FFC, on the Forecast Technology page, cited above.

Unemployment Rate

Gross National Product

Index of Industrial Production

Retail Sales

Non-residential and Residential Fixed Investment

Manufacturing and Trade Activity

Money Supplies (M1, M2, and M3)

Personal Income

Business and Personal Savings

Imports and Exports

Commercial, Industrial, and Consumer Borrowing

Foreign Currency Exchange Rates

Global Stock Market Indices

Various U.S. And International Money Rates

(FFC, 2004, "Forecast technology" (http://www.forecasts.org/info/tech.htm)

The predictions from the models are considered against the historical movement of an index, indicator, or stock as a double check. If the models predictions are truly unrealistic, they are reformulated and rerun." (FFC, 2004, "Forecast technology" (http://www.forecasts.org/info/tech.htm) It is within these statistics and others, as well as historical data that is found the housing starts forecast for the United States.

The impact of such forecasting is obvious given the importance of this particular economic indicator. In a very recent article associated with an unexpected fall in the housing starts figures, (for June 2004) one journalist touches on just the bear minimum of effects the troubling reality vs. forecast might have on the economy. "Home construction defied expectations and took its biggest tumble in more than a year during June amid higher mortgage rates, and building permits also fell sharply." (Bater, July 13, 2004, Housing Starts Plunge" (http://www.smartmoney.com/bn/ON/index.cfm?story=ON-20-0843) number of issues associated with the homebuilding industry, both macro and micro are decided based on these forecasts. The industry as a whole may need to make macro decisions about supply and demand for future building. If to little raw material is available then production falls below acceptable levels and if to much is allocated there is a surplus that will cause concern in the raw materials industry.

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New housing construction is important to the overall economy. Construction results in the hiring of workers, the production of construction materials and equipment, and the sale of large household appliances such as ranges and refrigerators. In addition, when owners or tenants occupy the housing, they often buy new furniture, carpeting, and other furnishings. (Norman Frumkin, 1990, p. 129)

Additionally, as you can see from the above citation there are many other industries tightly linked to the homebuilding trade that can be effected by false start statistics and erroneous forecasts.

On a micro level individual businesses may view these statistics, both regionally and nationally to help them adjust their sales, financing and output of production. In many situations builders rely on presales to fiance the production of homes yet, this is not always available, as the real estate market must always show a marginal surplus so individual home investors have a market to choose from. In the event that a building project is not pre-sold the finished project must be floated by the builder and his investors until the completed home sells. Basically, the builder and his or her investors are paying a mortgage payment for the cost the project incurred during the construction process. During this time the builder is paying an increased level of interest on the construction loan for the property. If the business is small enough or does not possess the needed capital to float all these construction loans the company may go bankrupt. So, finishing on time, on budget and selling the home are absolutely crucial issues in the construction trade.

Interest rate sensitivity and cash flow from sales are significant factors in pushing a project to completion. Interest rates can stymie sales or squeeze the builder on a construction loan. Indeed, rapid rate rises on loans after construction has started can bring work on a building or a development to a grinding halt. As well, a downturn in the market can crimp sales, effectively cutting off funding for the next segment of construction. (Finkel, 1997, p. 36)

So, how does the housing starts forecast effect such issues. If the housing starts forecast is an indicator to the builder, his or her investors and the lending institutions a sudden fall in the real statistics, versus the forecasts statistics could severely disable the company's ability to both complete a project and find future funding.

Another factor that influence the housing starts statistics and the building industry in general is interest. During times of economic upturns there may be rises in the interest rates that do not necessarily reflect the actual housing market or the economy in general.

This can cause lenders to think much more carefully about how they will lend in the future, as without buyers willing to lock into the new higher rates the lenders may be reluctant to lend on any new projects.

The Wall Street Journal noted that the credit crunch of 1993 exerted a veritable "choke hold" on home builders, with only the top quality and the most secure builders able to qualify for funding (Carlton 1993). Small and mid-sized builders are vulnerable to such mundane factors as bank-lending attitudes (Carlton and Pacelle 1992).

(Finkel, 1997, p. 36)

Sadly it is not unusual for all of these factors to collectively cause a perceived positive economic forecast to become negative in a hurry. In the article above associated with the recent fall in housing starts, there is a clear indication that the forecasts, though not very high, did expect a minimal growth in housing starts, that was realized instead by the actual significant fall of the statistic. "The report Tuesday was worse than analysts expected. A….....

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