New housing permits fell in November to a new low since the data began to be collected since 1946. According to the Census Bureau, 616,000 building permits for privately owned housing units were issued in November—15.6 percent below the October level, and 48.1 percent below the level of a year ago.

The sharp fall in new permits is a sign that the market is still adjusting. Builders have no incentive to build new houses given the large excess supply of houses and falling prices. The more they cut construction, the sooner the housing market can recover. 

Historically, the number of new housing permits closely tracks the changes in housing prices. The chart below shows the number of new housing permits issued each month and the annual rate of change in the price of existing houses (as measured by the 10-city composite Case-Shiller Index Home Price Index).  

Since 2006, there has been a sharp decline both in the number of housing permits and in the rate of change in home prices. Both reflect the oversupply of housing relative to demand. The National Association of Realtor reports that at the end of November there were 4.2 million existing homes for sale, which represents an 11.2-month supply of inventory. The inventory needs to be reduced to about an 8-month supply to bring about price stabilization.  Thus, the current fall in new housing permits, while dramatic, represents a healthy response to the state of the housing market.   

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