- by New Deal democrat
On Friday housing permits, starts, and units under construction were finally reported for the first time in four months, since September’s report for August. The bad news is that the report only updated through October, so we are still two months behind. The very qualified good news is that, since housing is a long leading indicator, even with this lag the report still gives us insight into where the economy is likely to go in the next eight months.
When I last updated this information in September, I wrote that “a puzzling relationship this year has been that the housing data has been classically recessionary for a number of months, and yet the economy has not rolled over.” That May no longer be true, in that the government shutdown may have caused at least a brief economic contraction, but we won’t know that - even even if it was probable - until real sales and consumption are updated for last autumn later this month.
So let’s start by reiterating the basics: mortgage rates lead sales, which in turn lead prices, which in turn lead inventory.
Mortgage rates have fluctuated in a range between just over 6% to 7.6% in the past 3+ years (red, left scale in the graph linked to below), and housing permits have similar been rangebound between 1.330 and 1.620 million annualized (blue, right scale) over that same period:
In the past several months, interest rates have been near the bottom of their range, and permits responded in September and October by increasing from their August post-pandemic low.
In more detail, total permits increased 82,000 to 1.412 million during that two month period. Single family permits, which convey the clearer signal, increased 18,000 to 876,000. Meanwhile the much noisier and slightly lagging housing starts declined -45,000 to 1.246 million units, their lowest number since the pandemic:
The decline in starts is unsurprising, since permits made their post-pandemic low in August, and as stated above, starts tend to follow within several months.
Even with these gains, permits and starts remain in territory below their peaks sufficient to be consistent with a recession. On the other hand, all three measures are down less than -10% YoY, where in the past it has taken a more severe decline of greater than -10% to be consistent with with a recession:
Let’s turn next to the number of housing units under construction. As I have written many times in the past several years, it is the best “real” measure of the economic impact of housing (blue in the graphs below). In September and October they remained almost exactly unchanged from their post-pandemic low in August, up only 2,000 units, but still down -23% from their peak:
The above graph shows how they have followed single family permits (red), as expected. More often than not in the past by the time a decline in units under construction had declined by as much as they did in August - and September and October - a recession had already begun. The only two exceptions were the late 1980s, where the pre-recession decline was -28.2%, and 2007, where the pre-recession decline was -25.6%.
Now let’s update housing units under construction with the typical final shoes to drop before recessions, houses for sale (gold) and residential construction employment (red), in comparison with units under construction, all normed to 100 as of their respective post-pandemic peaks. Both the number of employees in residential construction and new one family homes for sale peaked in March and have declined almost uniformly since:
On a YoY basis, with the exception of 1974 and the COVID recession, houses for sale and (once available) employment in residential construction had turned down YoY before the recessions had begun:
As of their last update for August, houses for sale were still higher by 4.0% YoY, but as of last Friday’s employment report for December, residential construction employment is now down -0.1%.
In September I concluded that August’s report was “very much recessionary, although in some YoY comparisons, I would expect further damage before the actual onset of one. But that could easily occur within the next four to six months.” Indeed, per my last paragraph above, to the extent available, some of that has already happened. Additionally, as I pointed out several weeks ago, employment, industrial production, and real manufacturing and trade sales, as of their last reports, were all below their respective spring and summer peaks. On the other hand, the fact that permits did rebound for two months and units under construction did not decline further argues for the possibility of a bottom in the housing market and the proverbial “green shoots.”
The big missing piece remains real personal spending, and we won’t know anything about that even for autumn until later this month.
