Housing: Permits and average starts decline while construction remains on top

by a New Deal Democrat

Housing data this month was mixed. Although starts rose, their 3-month average, annualized at 1,511, was the lowest from September to November 2020. Meanwhile, both total and single-family permits declined, both to a low of June 2020:

This year I also saw a record number of homes that had permits but had not yet been started. They have been at 50-year highs and distort the economic signal from permits, since construction itself is the actual economic activity. Here again, the evidence is mixed.

From a longer-term perspective, both permitted but not started housing units and housing under construction continue at record high levels:

But a shorter-term view shows that units not yet started were flat from March and housing under construction increased just 2% from April:

Historically, housing permitted but not yet started usually peaks shortly after permits. Dwellings under construction reached their peak with a longer delay:

We appear to be very close to (housing under construction) or even slightly behind (housing not yet started) inflection points for both metrics.

Over the past two months, I have emphasized that “Housing under construction is the final matching marker of housing economic activity. Once this starts to decline, housing’s contribution to the economy is negative in real time.“It looks like we’re close to that point, but not quite.

With that in mind, here are the single-family permits (blue, left scale) versus homes under construction (red, right scale) since the latest statistics began in 1970:

Historically, recessions have typically followed within a year of a 25% drop in single-family permits from their current peak. In a few cases (1969, 2001) the recession has already begun. There are a few exceptions, notably 1966 and 1984, when either major fiscal stimulus (the Vietnam War and Great Society spending) or interest rate reversals occurred. Neither is currently in the offing.

At the same time, with the sole exception of the 2020 pandemic recession, construction—an even smoother indicator than single-family permits—has always peaked at least 6 months before the recession began, with an average time of 18 months , and as up to 47 months; and has declined by as little as 6.5% and as much as 34%, with an average decline of 20% from the peak.

So the permits tell us we’re probably headed for a recession, while the actual homes under construction tell us, by no means yet.

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