Plunging Permits Are Another Housing Canary

Housing starts rose far more than expected in the US last month, a development which, frankly, is hard to parse given how rapidly the market is evolving. Or devolving.

The upside surprise was accompanied by a 28% leap in multifamily starts. The rise in new single-family construction was much more subdued.

The 1.575 million annual headline pace topped the highest estimate from five-dozen economists. Revisions to the prior two months were negative. August’s 12% gain came on the heels of a double-digit decline in July, when the pace decelerated to a 17-month low (figure below).

When the vacancy rate is low, higher rates impact starts on a (considerable) lag. Mortgage rates fell precipitously over the summer after doubling from record lows set last year, only to surge anew, exceeding 6% last week.

Every recession going back six decades was accompanied by sharp annual declines in housing starts. The only exception was the dot-com bust.

Single-family starts, which had been mired in a five-month slump, rebounded in August, but “rebound” is probably a misnomer. “Ticked higher” is more apt.

The slight rise left the pace below the 1 million rate seen throughout the pandemic boom (figure above). Last month’s pace was still near a two-year low, and represented a 15% YoY decline.

Plainly, soaring costs for buyers and builders are starting to bite.

Note that permits dropped sharply, missing estimates in the process. The 1.517 million pace was well short of the 1.6 million rate consensus expected and came in near the bottom of the range from four-dozen economists.

The 10% plunge was the largest since the pandemic crash and the pace the most tepid in two years (figure above). The spread between the pace of permits and starts turned negative for the first time since June of 2021.

All of that is a manifestation of affordability concerns. The market is under pressure and demand is waning. It’s that simple.

Ultimately, the figures represented a mixed read on housing at best. I’d be inclined to suggest it was a lackluster report despite the headline starts beat.

The data came on the heels of another abysmal read on homebuilder sentiment, which fell a ninth month in September, according to the NAHB. Data on existing home sales is due later this week.


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3 thoughts on “Plunging Permits Are Another Housing Canary

  1. The other lagging effect which may be going on here is that builders anticipating a downturn may aggressively push starts on completed lots regardless of sale status. Those houses absorb sunk costs (materials and lot development) and provide a revenue cushion when the builders begin cutting lot development and crews as conditions worsen. If history repeats, eventually we’ll see builders selling land and land prices dropping. Hopefully won’t get that far.

    1. UTG. Good observation. That’s what the developer in my subdivision is doing. He is rapidly starting new houses on just about every lot he owns, even though sales of finished houses has clearly slowed. He seems to want to finish all he can and close out his obligations in the next 6-8 months, regardless.

  2. also possibly an overly exuberant short term reflection of July’s relief rally in rates that obviously has lost any and all traction…

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