Thursday, May 24, 2012

Housing: department of "Huh?!?"

- by New Deal democrat

Yesterday Barry Ritholtz published a piece that read, in its entirety:
For the crowd who are still clinging to the RE recovery meme, have a gander at these charts. Note that there are more new permits than starts, and more new starts than completions
Now, let me say that Barry has been a friend of this blog and has cross-published Bonddad or myself a number of times, so there is no ill will whatsoever, but we do have a disagreement about whether housing prices are making a bottom. Further, like Bill McBride, I really think we're past the point where it can be argued that housing sales aren't recovering (i.e., going up, even if the raw numbers are still very very low).

In any event, Barry's entire point puzzled me, since housing permits exceeding starts, which in turn would exceed completions is exactly what I'd expect to see in a recovery. The reason is the timing. Permits take place a month or months before a house is started, which in turn takes a number of months to complete. So it housing sales are going up, the increase has to make its way through the system chronologically. For example, is sales are going up 1% a month, and it is six months between getting a permit and starting the house, and 6 more before completion, we'd have something like 112,000 permits this month, with 106,000 starts based on permits taken out 6 months ago, vs. 100,000 completions of permits taken out a year ago. The reverse would apply in downturns.

Just to be sure, I went to the data. First let's pull up the entire history of housing permits, just to see the periods of time housing was going up vs. down.

Now let's subtract housing starts from housing permits. We'd expect to see a negative number in recessions and a positive number in expansions. what we actually get suggests a strong secular change over time (I have no idea how you get starts exceeding permits for several decades straight, but there it is). But at very least from 2000 to the height of the housing boom, there were more permits granted than starts begun. During the bust, more starts were made than permits issued. And now recently, more permits have once again been issued than starts made:

But it is in comparing starts with completions that the pattern really asserts itself. Here there is no doubt of the truth that starts exceed completions in a boom, and trail them in a bust:

So Barry winds up making a very effective case that the housing recovery has indeed begun.