Wednesday, July 18, 2018

Disappointing housing permits and starts point to housing, GDP slowdown

 -  by New Deal democrat

For the second month in a row, the preponderance of evidence from housing permits and starts is that increased interest rates and continuing increased prices are beginning to take a bite out of the market. 

FRED doesn't have the graphic updates yet, so let's look at the charts provided by the Census Bureau.

First, here are housing permits:

Total permits declined to a 9 month low, and are actually down YoY. The less volatile single family permits rose, but are just above its 9 month low from one month ago. 

This remains the first time that single family permits have declined about 4% since 2010. But because the peaks for single family homes were only in February, and overall in March, not enough time has passed to be confident that this downturn is truly significant. Declines of 4% or more took place several times in the 1990s and 2000s without signaling the top of the market, as in 1994-95, 1996, and 2004:

It is noteworthy that in 2017, there was a similar pattern of new highs in permits during the winter months, and a decline in the spring and summer. So there may also be some residual seasonality that has not been accounted for (data shown through May):

The more volatile total and single family housing starts also declined to 9 month lows:

There were also significant downward revisions to the last several months. This had a significant effect on the three month rolling average, which cuts down on volatility. Initially, last month's three month average was a new expansion high. With the revisions, the high is now back in March.

So there is not enough evidence of a significant downturn to set off any recession alarms. It would take a decline of at least 5% from peak in single family permits for me to change my evaluation of the housing market. At the same time, as I noted last month, even though the economy didn't roll over, in two of the last 3 times -- 1994 and 2004 -- where there was a similar decline in permits outside of recessions, real GDP did slow down:

Further, note that we are getting the same message from the flat but not inverted yield curve, which over the last few decades has signaled a substantial slowdown in GDP growth several quarters later.

Thus,while the evidence is hardly conclusive, there is an increased preponderance of evidence  that housing is slowing down, and that this slowdown will show up in GDP within the next year.