- by New Deal democrat
When I 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.” I concluded that update by noting that while the report was “very much recessionary, [ ] 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, some of that did happen in the October report released last month. On the other hand, I noted that 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.”
So the short term outlook and the longer term outlook may have begun to diverge.
Let me start by reiterating the basics: mortgage rates lead sales, which in turn lead prices, which in turn lead inventory. Sales, in the form of permits and starts, are long leading indicators. Inventory, in the form of units under construction, is a shorter leading indicator. Further, as has become increasingly important in the last year, employment in residential construction, and the inventory of houses for sale, are the last to turn down before a recession. Here’s the historical pre-pandemic look at that last relationship:
Per my opening remarks above, the housing market has been in recessionary territory for many months. So let me take the data out of my usual order, and focus on the short leading indicators first, before discussing the longer leading ones.
To wit, housing units under construction declined -1.5% to 1.277 million annualized, the lowest number since 2021, and -25.5% below their late 2022 peak:
There have been only two times in the past 50 years when such a decline did not yet give rise to a recession: in 2007, when the decline was just -0.1% lower, at -25.6%, and 1991, when the decline was 28.2%. As is apparent from this, just a further -2.8% decline from here would give us an all-time decline without a recession.
Now let’s look at the post-pandemic record of residential construction employment and new housing inventory for sale in comparison with units under construction:
Both of the above “final shoes to drop” have in fact dropped. With the recent revisions, employment in residential construction peaked in March 2024, although it is only down -1.5% from there. New housing for sale peaked in March and May of last year, and is currently down -3.2%. Historically this decline in inventory under these circumstances meant a recession was already underway, although the decline in employment in the past had typically been on the order of -5% to -10% before a recession began.
But if the above discussion suggests that housing remains recessionary - in fact, by most measures a recession should already be underway, the more leading indicators suggest that if it does not happen in the next few months, it is not likely to happen at all.
First of all, although I won’t bother with a graph, mortgage rates have fluctuated in a range between just over 6% to 7.6% in the past 3+ years. In the past several months, interest rates have been near the bottom of their range, and permits have responded.
In more detail, in December total permits (red in the graph below) increased 60,000 to 1.448 million, . Single family permits, which convey the clearer signal, increased 18,000 to 876,000. Meanwhile the much noisier and slightly lagging housing starts rose 60,000 to 1.448 million units, over 100,000 higher than their recent October low:
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:
Further, in the past once permits and starts have bottomed, it is a signal that a recovery from a recession will begin within the next 6 - 8 months.
Similarly, the YoY% decline in housing units under construction, which I discussed further above, has also improved significantly from its worst levels of 2025. In the past, this has almost always meant that a recession has already ended:
The only episode which is consistent with the present was the late 1980s, where YoY declilnes stabilized for several years before the 1991 recession began.
In short, most of the housing metrics are telling us that we should already be in recession, while the more leading ones are telling us that if one does not happen in the next few months, it is unlikely to happen at all.
I continue to believe that the decisive factor which has prevented the economy from rolling over so far (unless the government shutdown last autumn proves to have been the precipitant) is the AI Boom, which has led to stock market gains, and a “wealth effect” increase in spending by the uppermost income consumers.
