– by a New Deal Democrat
The housing sector had another negative month in July. Permits (gold in the chart below) fell -1.3% to 1,674 units y-o-y, an 8-month low. Single-family permits (red, right scale) fell -4.3% to 928,000 units year over year, the lowest level since January 2020, excluding the pandemic lockdown months. And the quarterly average number of starts (blue) fell to 1,536 units on a year-over-year basis, the lowest level since September-November 2020:
Total permits were still slightly higher year-over-year, +1.1%, but single-family permits were down -11.7%:
Earlier this year, I pointed to the record number of housing units that have permits but have not yet been started, pointing out that this distorts the economic signal, noting that “The mystery is whether the 50-year backlog in units not yet started will slow the decline until it goes away… Since starts are the actual economic activity, until I see an unequivocal decline there, the massive negative signal from permits, mortgage rates and applications for mortgages remains in question.
Permits continued to fall last month, as did starts, confirming that signal. This month, the signal became even clearer and also clearly extended to housing permitted but not started (gold in the chart below) and housing under construction (blue):
Here’s the long-term view from 50 years ago:
During peak periods, housing that has not yet been started follows permits with only a short delay, with a longer delay until housing under construction peaks. While we are not currently concerned with this, note that in downturns, housing that has not yet been started declines with a much longer lag than permits, almost as long as housing under construction.
Last month I wrote: “ 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. We’re probably only a month or two away from that point. In other words, the leading indicators will be joined by the matching indicator.”
As shown above, housing starts have peaked over the past 3 months. Although housing’s contribution to the economy is not yet significantly negative, it is on the verge of becoming so.
In the past, declines of this magnitude corresponded to either recessions or near-recessions in 1966-67, 1984-85 and 1994-95. The more housing declines, and as I reiterated yesterday, I expect more declines, the more certain a recession becomes and the deeper the bottom of this recession.