Housing start data spells good news for recession fears: Economist

In the past 40 years, a year-over-year decline of 20% or more in single-family housing starts has preceded all but 1 of the 5 recessions

The inversion of the yield curve — when long-term interest rates drop below short-term interest rates — this week was seen as a warning sign to many that another recession was looming. But Friday morning’s housing start data means we shouldn’t sound the alarms just yet, according to Odeta Kushi, the deputy chief economist at First American.

“There are many factors to consider beyond the inversion of the yield curve when determining recession risk,” Kushi said. “Single-family housing starts have been a more reliable indicator because they are a reflection of both homebuilder and consumer confidence.”

While privately owned housing starts continued their month-to-month declines in July, dropping 4 percent from June, according to the U.S. Census Bureau and U.S. Housing and Urban Development. Housing starts increased 0.6 percent year-over-year and most of the monthly declines were in the multifamily sector with single-family housing starts increasing 1.9 percent month-over-month.

“While in recent months housing starts have slowed, July’s 1.9 percent year-over-year gain in single-family housing starts demonstrates homebuilders remain confident,” Kushi said.

In the past 40 years, a year-over-year decline of 20 percent or more in single-family housing starts has preceded all but one — in 2001 — of the five recessions. Conversely, the yield curve has inverted 36 times since over the last 40 years, with only five recessions.

“Homebuilders are reluctant to break ground on new projects if they fear the economy may slump later,” Kushi said. “Likewise, consumers are hesitant to make a large investment if they fear losing their jobs.”

New housing authorized by permits are up 8.4 percent month-over-month and 1.5 percent year-over-year. Housing completions are also up 7.2 percent month-over-month and 6.3 percent year-over-year.

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