Photographer: Luke Sharrett/Bloomberg

One Chart Shows Why U.S. Housing Starts Are Poised to Surge

The ratio of starts to sales has plummeted.

Despite the tailwinds of strong jobs growth and the vanguard of the millennial generation entering their prime homebuying years, developers have been strangely reluctant to break ground on new single-family homes in 2016.

This segment has seen so-called housing starts dip to a seasonally adjusted and annualized rate of 722,000 as of July, down from 765,000 at the end of 2015.

Neil Dutta, head of U.S. economics at Renaissance Macro Research, highlighted that the strength in new home sales relative to home starts suggests that construction activity is due to rise significantly in the year ahead.

"The last time the ratio of starts to new home sales was this low, starts ending up surging for the next year," he wrote.

NHSPS1 Index (US New Privately O 2016-09-20 09-01-58
Source: Neil Dutta/Bloomberg

When the ratio of starts to new sales tumbled to a similar level around the beginning of 2015, new activity rose at a robust clip for the next 12 months, culminating with starts in February hitting a seasonally adjusted and annualized rate of 845,000.

In a note to clients, Dutta added that the rise in homebuilder confidence also belies the subdued level of starts.

"Something seriously has to give here," he concluded.

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