Permits and housing starts continue to decline, but housing under construction continues to (slowly) increase

– by a New Deal Democrat



The monthly number of home permits, new construction and single-family permits decreased this month. Clearances (red in the chart below) fell -38,000 year-over-year to 1.526 million year-over-year, and starts (blue) fell -62,000 year-over-year to 1.425 million, both the lowest since the summer of 2020 Single-family permits (gold, right scale), which have the most signal and the least noise, decreased -31,000 year-over-year to 831,000, the lowest level since May 2020 and prior April 2019 low:

Perhaps more importantly, here’s a variation of a graph I’ve done many times over the past 10 years comparing the year-over-year change in interest rates, in this case mortgage rates (inverted, *10 for scale) with the year-over-year change in the total number of housing permits (red) and single-family permits (gold):

These are within the ranges of declines previously consistent with recessions except for 1966, although often (not shown) the actual recession did not begin until there was a -40% decline.

As I always point out, interest rates lead housing permits by roughly 3 to 6 months. As shown above, for example, this year mortgage rates turned negative (i.e. higher) on a year-over-year basis in April. Permits for housing in general and for individual family units followed in August. As of now, annual interest rates have risen by almost 4%, an increase exceeded only by 5% and 6% increases in 1980 and 1982, respectively, which coincided with a -50% decline in housing permits (not shown). Thus, we should expect housing permits to have declined by about -40% by around January or February to levels of 1.100-1.150 million and .700-.740 million units on an annualized basis, putting the likely start date of the recession in the first quarter in 2023.

BUT this time it really is a little different. Historically, housing permits and not-yet-started and housing units under construction have typically declined well before the onset of each recession:

But due to a shortage of building materials, there is a record number of housing units that have been permitted but not yet started (blue in the chart below), which appears to have peaked in July, and therefore a large backlog of housing under construction (red ), which edged up again this month, despite rising just 3.2% over the past 6 months:

Since housing under construction is the real economic activity, this suggests that residential construction continues to contribute very little to GDP growth.

This is reinforced by the broadly matched nature of housing construction employment (gray in the chart below) compared to housing units under construction:

With the sole exception of the 2020 pandemic recession, construction, which is an even smoother indicator than single-family permits, has always peaked at least 6 months before the onset of the recession, with an average time of 18 months and up 47 months; and has declined by at least 6.5% and up to 34%, with an average decline of 20% from the peak:

In other words, there is a significant element of “this time is different” as construction in the past has typically followed permit declines by 0 to 11 months, with an average period of 5.5 months. Furthermore, a recession usually follows a decline in construction by between 6 and 47 months, with an average time of 18 months; and has declined by as little as 6.5% and as much as 34%, with an average decline of 20% from the peak.

We are now 10 months from peak permits and construction is still not over. Nor is housing employment, which also typically declines months before any recession. Thus, past history suggests that the recession does not begin until at least 6 months from now, and possibly much later – depending on how quickly construction turns and how suddenly it declines.

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