Home, sweet home! Doesn’t everyone want to own one? For many, the homeownership is an important goal, or even the cornerstone of middle class life, the epitome of American Dream. Although the Great Recession and the burst of the housing bubble diminished the allure of homeownership, still many people dream about their own place. Indeed, each year millions of new houses change hands – and millions of new construction projects start.
This is exactly what housing starts show. They are the number of new residential construction projects that have begun during any particular month. The start occurs when excavation begins for the footings or foundation of a building. It is published monthly, a few weeks following the reported month. Investors should remember that month‐to‐month changes are seasonally adjusted, and the statistics often show movements which may be irregular, so longer time series are more reliable than single reports.
Housing Starts and Gold
Housing is a key part of the U.S. economy, so the housing starts figures are closely watched by analysts. The rule of thumb is that housing starts are procyclical, i.e. they move in tandem with the business cycle. When the economy is strong, people buy more new homes, while when economy struggles, people are less eager to purchase new houses. Actually, the housing starts are believed to be a leading indicator: increases in housing activity boost GDP growth, while decreases hamper the economic growth. If true, the housing starts should be negatively correlated with gold, which tends to struggle in good times and to shine during economic downturns.
Let’s see whether it is really the case. As one can see in the chart below, the housing starts are quite volatile and not necessarily correlated with the broad economic activity. They do sometimes lead the general economic activity. For example, the housing starts peaked in January 2006, almost two years before recession. However, they were increasing in advance of the 2001 recession. So, don’t put all your eggs in one basket - housing starts are not the most reliable leading indicator.
Chart 1: Housing starts (red line, left axis, in thousands of units) and the gold prices (yellow line, right axis, London P.M. Fix, in $) from January 1971 to May 2019.
And what about the link between the housing starts and gold? There is a seemingly negative relationship. In the 1990s, the housing starts were in an upward trend, while gold remained in the bear market. Then, the housing starts collapsed in 2006, while gold enjoyed its bull market. And when gold decline accelerated in 2013, the housing starts were in a recovery. However, the relationship is not very tight, especially in shorter horizons. For us, the negative correlation results from the fact that both series react differently to the broad macroeconomic trends. Hence, it is useful to observe the data on housing, but the precious metals investors should be aware of their limitations.