Tuesday, December 19, 2023

Housing under construction continues to levitate


 - by New Deal democrat

Although they aren’t the most leading of housing metrics, because of supply-chain issues during the pandemic, housing units under construction has been the most important one, because they represent the actual economic activity of construction. With the exception of 2001, which was an investment-led downturn, they also have always turned down significantly before a recession has begun. Further, as I wrote there months ago and as shown in the below graph, “multi-family units under construction, which typically turn after single family units, have also usually (except for 2008 and the pandemic) turned down before recessions have begun:”

And this morning’s residential construction report for November showed that housing units under construction *still* have not turned down significantly. In fact, total units under construction (blue in the graph below) rose a seasonally adjusted 11,000, only 25,000 below their October 2022 peak. Almost all of that was due to an increase in single family construction (red), while multi-unit structures under construction (gold) declined 1,000:

This is not recessionary, especially keeping in mind that the manufacturing sector is not as important for forecasting purposes as it was before the China manufacturing shock that began in 2000, so construction has become more important.

The most leading of the construction metrics is permits (blue below), which declined 38,000 for the month, and the least noisy sub-sector is single family permits (red), which rose 7,000 and are 228,000 above their January 2023 low. On the other hand, multi family permits (gold) declined to a new three year low:

The likelihood is that single family permits will flatten or decline slightly in the immediate months ahead, as they typically follow the much more noisy single family home sales (blue below) by several months, and the trend there has turned down:

For completeness’ sake, below are total (blue), single family (red), and multi-unit (gold) housing starts, which are much noisier than permits and tend to lag a month or two behind them:

Starts rose sharply - by 191,000 and are 255,000 above their August lows, driven mainly by the upturn in single family permits. This simply confirms the increase in permits as shown above.

Finally, since housing follows interest rates, here is an update of the YoY change in Treasury interest rates (inverted, blue) vs. the YoY change in single family permits (/10 for scale):

The big increase in permits this year has not been supported by interest rates through November, which continued to be higher (hence suggesting lower activity) than one year ago. This is yet more reason to believe that the recent increase in permits will flatten out or decline in the near future.

To summarize, both interest rates and single family sales indicate that it is unlikely the recent increase in permits and starts will continue. Additionally, the big surge in the past several years in multi-family unit construction is likely to follow permits in turning down. But there is no recessionary import in the present trend.