- by New Deal democrat
When it comes to housing, the post-pandemic economy has been odd. That’s because, as of last year by all accounts housing had deteriorated sufficiently that a recession should already have begun. Not only did that not (quite) happen, but the current situation would be more congruent with such a recession ending than ongoing. In general, that’s because even though job creation stagnated, real incomes did not, and real consumer spending was sufficient to keep the economy in expansion.
In the past few months, the situation has reversed, with real incomes declining, but manufacturing and job creation rebounding. And housing is playing a role in that conundrum as well. Let’s take a look.
In May, almost all of the headline housing data was negative. Starts (blue), which are noisier and slightly lag permits (gold), declined sharply, down -215,000 to 1.177 million units annualized. Permits declined -10,000 to 1.413 million. The one slightly bright spot was that the metric which is the least noisy as well as being most leading, single family permits (red, right scale), rose 5,000 to 886,000:
Permits, including single family permits, were near five year lows, but close to average readings for the past year. But housing starts had their worst month in over 5 years! But because they are so noisy, I am discounting that. Still an “average” down in the doledrums month is definitely not positive.
Perhaps more interesting is that the recent uptick in mortgage rates (blue in the graph below) due to the Iran war has not really had an effect on the sideways trend:
Still, on a YOY% basis, starts are down -8.7%, while permits are down -0.2% and single family permits are down -7.1%:
This is a sector that, to repeat, is down in the doldrums, and shows no sign of improvement.
On the other hand, as I have noted for the past several months, the YoY downtrend has not been worsening for many months. Typically permits and starts have been down 20% or more at the onset of recessions in the past, although in the 1991 and 2001 recessions, they were only down about -10%; and there have been a number of times, for example 1966, 1987, and 1995, where construction has been down -10% or more YoY without a recession occurring:
On the contrary, the negative but relatively minor and stable negative YoY changes beginning last year have been just as consistent with mid-expansion slowdowns as with recessions, and stable if negative YoY changes have sometimes occurred during recessions a few months before recoveries.
But the statistic in this release that most closely aligns with the actual economic activity represented by the sector is the number of housing units under construction. In May they also declined, by -11,000 to 1.266 million annualized, only 4,000 above their post-pandemic low in March, down -7.1% YoY, and down -26.1% from their peak:
The historical version of this metric shows that more often than not in the past by the time a decline in units under construction had declined by this much, a recession had already begun:
Indeed, typically this metric does not turn upward until after the recession has been over - part of the current conundrum.
Finally, let’s update the graph that additionally shows the typical last shoes to drop before recessions, including houses for sale (gold) and residential construction employment (red, right scale), all normed to 100 as of their respective post-pandemic peaks:
Residential construction employment has been close to flat for the past nine months, and the number of housing units for sale actually rebounded slightly as of its last report for April.
It’s fair to say that the housing market did not follow its typical predictive pattern following the pandemic, and the big increase in interest rates that began in 2022. Although all of the relevant housing metrics fell by percentages from peaks that normally signaled recessions in the past, that did not happen this time. In large part that was because of the huge backlog in building that meant that units under construction did not significantly decline until the mortgage rate and manufacturing situations in the economy stabilized. The latter in particular began to improve substantially beginning in the latter part of 2024, despite the subsequent headwinds of new tariff costs imposed last year. And the continued increases in real incomes and payrolls through 2025 meant that the 75% or so of the economy that is the service sector continued to be fueled by consumer spending.
But housing is also not contributing positively to the economy, either. That means that if the recent downturn in real incomes continues, the rest of the economy may yet go down.
