Thursday, May 16, 2013

Weak housing starts? Permits are a better indicator

April housing starts were sharply lower than expected (853K vs. 970K), but building permits were much stronger than expected (1017K vs. 941K). The past behavior of these two series suggests that in cases like this where starts are this low relative to permits, they usually come back into line with permits in the subsequent month. Thus it's reasonable to expect that starts will bounce back next month, and that the boom in residential construction activity is ongoing.

Not surprisingly, building permits and housing starts tend to track each other very closely, and it's reasonable to assume that builders must first acquire a permit before starting construction. Logic would thus suggest that the sharp divergence in these two indicators should be resolved in the direction of permits.

The above charts show the long-term history of the level of starts and permits and their ratio (on the bottom half of each chart). Note that the ratio averages just about 1 over time, which means that indeed the two series are measure two sides of the same thing: residential construction activity. The top chart gives a long-term view, while the bottom chart zooms in on the past several years. Note that April 2013 marked the lowest level of this ratio in the past 13 years. In fact, it was the lowest ratio in the entire history of these two series going back to 1960, and this strongly suggests that April starts were the outlier. Something similar occurred in December 2010, when permits rose strongly but starts were flat. The following month the ratio shot higher as starts surged.

Starts and permits have been rising at about a 30% annual pace for over a year, and there is no reason to think that this boom has suddenly come to an end.


McKibbinUSA said...

Housing construction was one of the few organic growth activities in the US economy through until the economic crisis began in 2008 -- I regret that housing may never fill that vital organic role in the future of the US again -- that the America would trade housing construction for military-industrial manufacturing, public services, and financial services is one of the outrages of our time -- anyone who cannot acknowledge this disaster is part of the problem with America today -- housing construction is an American industry that cannot be outsourced overseas -- perhaps that is why housing construction has been abandoned by Federalists -- in the final analysis, America can never again be great until housing construction and growth can be restored to its former growth levels -- the problem with the US economy was never housing -- the problem with America is a system that would trade housing construction to save a military-industrial complex and Federal system that requires all of America's wealth in order to save Federalism from itself -- so sad...

marmico said...

Note that April 2013 marked the lowest level of this ratio in the past 13 years.

And did March 2013 mark the highest level of this ratio in the past 13 years?

Flip, flop on the start or permit indicators.

Benjamin Cole said...

I think we have long, long rally in housing.

Also, what other investment can you leverage to buy, live in, have your interest payment be tax deductible, and then get capital gains free and clear (if over age 55 when you sell).

The tax code artificially gooses house prices at all times. (When damning federal involvement in housing, people always forget to mention the tax code).

I see long, long rally---baby boomers need something to retire on, and stocks may not do that.

Benjamin Cole said...

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment.

That's down 0.2 percent in March and down another 0.4 percent in April. Right now, we are in deflation.

This is Fed easing?

Or is this Japan?

What is the definition of "Fed easing"--is that when you get inflation down to one percent? As in "easing" down to one percent?

Volcker was crowned inflation-fighting king when he got inflation down to five percent

Bernanke has it at one percent.

You gotta have good PR, or be 6'7" and stern-looking.