Housing Starts See Seasonal Impact, Despite Adjustment

Housing starts lifted the stock market to start the day today, but only until consumer sentiment was reported.

Economic news today was mixed, but it was the one factor that did the market in which raised it this morning, housing.

Housing Starts

April housing starts were reported ahead of forecast today, but we expect seasonality played a role, despite supposed seasonal adjustment. Here's why...

The spring season is typically the strongest selling period for the housing industry. Therefore, economic reporting of housing starts is seasonally adjusted. However, this is an imperfect science. Adjustments are made based on averages over years of study, and in real life, we exist in a world that is anything but average...

The current housing market is in fact within a dramatic decline, perhaps the greatest on record. So, rising from the depths of such dramatic decline should prove quite different than the average seasonal rise. This is a qualitative description of a mathematical relation to help you to see things outside the equation.

Typically, every spring, the housing market performs better than the winter before. There's an average seasonal boost that has been calculated, and that adjustment is applied to newly reported quarters in an attempt to relay what the real change is, excluding seasonal factors. April's starts rose 8.2% over March, but were 30.6% short of the prior April figure. Thus, you can see how we could get an irregular reading this time around. For this reason, there's an error estimation of give or take 14.5% that could apply to the month-to-month figure, but only a 6.7% margin for the year-over-year measure. So, you see, the entire improvement could be explained by error.

Therefore, hold your horses before predicting the housing market turn. We must say though that even we want to believe in it. Permits increased 4.9% over March, but were likewise off 34.3% from the prior year month. Here, the margins of error were calculated at just 1.2% and 1.4%, respectively. Still, let's wait and see how results prove out later on this year before we call a bottom.

University of Michigan Consumer Confidence

Consumer sentiment was reported very weak, at 59.5, short of the forecast for a reading of 62.5. The measure was also down from April's 63.2. However, remember that consumer sentiment is a lagging indicator. By the time Main Street thinks things are dire, the worst is usually over. In any event, the market turned lower once the news broke.

Please see our disclosure at the Wall Street Greek website. Article interests AMEX: DIA, AMEX: SPY, AMEX: QLD, AMEX: DOG, AMEX: SDS, Nasdaq: QQQQ.