- by New Deal democrat
As usual, the month’s important housing data starts out with construction.
For a quick refresher, I follow this because housing typically leads the rest of the economy by a year or more. After the very leading, but very noisy and heavily revised new home sales (which will be reported next week), permits turn first. Single family permits in particular are the least noisy of all the housing indicators. Next, with a month or two delay, come starts, which are also much noisier and work best as a three month average. Among the most important data, next - with a significant delay - comes housing units under construction, which is the actual total economic activity. Finally - again frequently with another significant delay - comes employment in housing construction, which is part of the monthly employment report. And mortgage rates lead all of the above.
Last month I noted that new home sales have been rangebound for the last two years, which suggested that permits would likely continue to be the same. And in February they were, as permits declined a slight -17,000 on an annualized basis to 1.456 million. Single family permits (red, right scale below) declined only -2,000 to 992,000. Starts (light blue) on the other hand rose 156,000 annualized to 1.501 million. Their three month average rose to 1.459 million, the highest in exactly 12 months:
It is possible, as with so much other post-pandemic data, that there is some unresolved seasonality, because as you can see the December-February period was also the 12 month peak for starts one year ago. Most likely we are seeing a noisy recapitulation of the slight improvement in permits since last summer, but still as with single family home sales, within a narrow range.
In the past 18 months, I have paid much more attention to housing units under construction (gold in the graph below), the “real” measure of economic activity in housing. Throughout late 2022 and all of 2023, it levitated at near record levels. It then precipitously declined, and as of February it is down -14.8% from its peak:
For the last number of months, I have suggested that this number would likely stabilize soon. It took longer than I thought, and with a deeper decline than I thought, but it appears that since November it has indeed stabilized at a level of roughly -15% below peak.
This is significant for recession forecasting purposes. Below I show units under construction YoY (red, left scale) and in absolute terms (blue, right scale):
On the one hand, on a YoY basis units under construction have never declined so strongly without a recession occurring in the near future. But the typical decline from peak has been much more than -15%, often being -35% or more, although recessions have occurred with only a-10% or so decline.
The last shoe I would expect to drop significantly before a recession is the number of jobs in homebuilding (blue in the graph below):
Like units under construction before them, housing employment has levitated for the past year, even rising to ever new levels. As you can see from the last 1980s, sometimes this has persisted for several years before the downturn. I am not expecting it to persist for much longer now. A -10% or so downturn in this type of employment has typically been the recession onset marker.
Finally, here is an updated graph of the YoY change in mortgage rates (*10 for scale, inverted), together with the YoY% change in total (light red) and single family (dark red) permits:
Mortgage rates dipped from 7% to 6.2% in late summer, shown as the nearly 10% improvement (blue) in the graph above. So far permits are nearly unchanged YoY. Some at least temporary improvement in their YoY comparisons seems likely, but since mortgage rates have recently risen back close to 7%, permits and starts are more likely generally to continue in their recent range.
The conclusion: this month’s housing construction report showed more of the same rangebound data. That’s “good” in that it is not worsening, but we can expect employment to finally follow the rest of the data down sometime soon. That would confirm that the housing sector is recessionary.
