Falling Housing Permits Suggests a Cautious Outlook for Housing

Housing activity slowed in September as starts and permits fell by 5.3 percent and 0.6 percent, respectively. Housing construction and permits are weakening after rebounding from the housing boom-bust cycle in the early to mid-2000s (see chart). The combination of rising interest rates and falling affordability is likely to provide resistance to a sustained reacceleration in activity.

Total housing starts fell 5.3 percent in September to a 1.201 million annual rate. The dominant single-family segment, which accounts for about three-fourths of new home construction, fell 0.9 percent for the month to a rate of 871,000 units. Starts of multifamily structures with five or more units plunged 12.9 percent to 324,000.

Among the four regions in the report, total starts fell in two regions, the Midwest (14.0 percent) and the South (13.7 percent), and rose in the West (6.6 percent) and the Northeast (29.0 percent). For the single-family segment, the pattern was the same.

For housing permits, total permits fell 0.6 percent to 1.241 million from 1.249 million in August. Permits have fallen in five of the last six months and are at the lowest level since May 2017. Single-family permits rose 2.9 percent to 851,000 while permits for two- to four-family units were up 11.4 percent and permits for five or more units fell 9.3 percent to 351,000.

Despite the developing weakness in housing permits, home-builder sentiment from the National Association of Home Builders ticked up slightly in October. The index came in at 68 after a 67 in September. However, the index is still down from a recent peak of 74 in December.

Housing permits is one of the AIER leading indicators. The permits indicator remained in a downtrend in September after turning downward in August and neutral in June. The housing market appears to be struggling with a combination of elevated home prices and rising interest rates. While affordability overall remains favorable, it has become significantly less favorable over the past few years. With interest rates likely to drift even higher over coming months and quarters, the outlook for housing is cautious. While the overall economy remains very solid, some headwinds are likely to restrain further gains for housing.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.