Housing Permits Get a Big Dip

Housing Permits - Solid MBA Applications

Before getting into Housing Permits let's review the MBA Applications. MBA applications and NAHB housing market index are on an island where the results are great.

Off that island we have home price growth falling, weak permits, and new home sales that have peaked. Most housing data will show positive growth in the 2nd half. But that’s a testament to how weak results were in the second half of last year. At best, the results are range bound. At worst, they have peaked for the cycle.

It’s still good to see solid applications growth though. MBA applications report for the week of July 12th showed -1.1% weekly composite growth. It lapped a 2.4% decline in the previous week. Purchase index fell 4% after rising 2% in the past week.

Yearly growth was still a solid 7%. It has been decently positive almost the whole year. Refinance index was up 2% after falling 7%. Average 30 year fixed mortgage rate was 3.81%.

That's 8 basis points above the recent low in the week of June 27th. Investors don’t expect rates to rise much in the next few months. They could easily fall a bit more and make housing more affordable.

Terrible Housing Permits

Housing Permits - Housing starts and permits both missed estimates in June. Number of starts fell from 1.265 million to 1.253 million. It missed estimates for 1.26 million. May reading was revised lower from 1.269 million.

As you can see from the chart below, housing starts were up 6% yearly. But the cycle high was 16 months ago in February 2018. This cycle will be similar to the 1990s in the sense that starts won’t crater in the next recession.

In the 1990s, they didn’t crater because the housing bubble was forming. Now, it’s because starts never increased. Housing starts are closer to being recessionary than in an expansion. Housing was overbuilt in the early 2000s, but now it’s being underbuilt.

Housing Permits - Housing starts, not permits, effect real residential investment.

Real residential investment growth will be positive in Q2, ending the 5 quarter negative streak. Single family housing starts were up 3.5% monthly to 847,000.

However, yearly growth was still a weak -0.8%. Multi-family starts fell sharply to 406,000 (monthly growth -9.2%). But the yearly growth rate was a very high 24.5%.

Permits were terrible. May permits were revised up from 1.294 million to 1.299 million. However, in June permits fell to 1.22 million. They missed estimates for 1.3 million and missed the lowest estimate which was for 1.251 million. They fell 6.6% yearly to the lowest level since May 2017.

Multi-family permits fell 16.8% monthly to 407,000. They fell 10.2% yearly. Single family permits were up 0.4% monthly and down 4.7% yearly to 813,000. Permits lead the housing market, so this report signals weakness is coming.

It’s interesting to see this weakness since the NAHB housing market index was a solid 64 in June (it was 65 in July). Finally, single family completions fell 1.8% monthly to 870,000. And multi-family completions fell 12.9% to 291,000.

Another Solid Jobless Claims Report

Housing Permits - Jobless claims in the week of July 13th rose from 208,000 to 216,000 which was above estimates by 1,000.

As you can see from the chart below, the 4 week moving average actually fell from 219,000 to 218,750. Continuing claims fell 42,000 and the 4 week average was steady at 1.701 million.

To summarize, the data has basically been the same for the whole year except when claims fell sharply in the spring.

Almost every jobless claims report in 2019 has told us the same thing which is that the labor market is in solid shape. Any growth weakness in job creation hasn’t been a huge deal. Especially when you consider how tight the labor market is.

There is no evidence of a recession. Jobless claims is one segment of the Aruoba-Diebold-Scotti business conditions index which is near 0. Meaning, there is no sign of a recession. Anything below 0 means growth is worse than average. But it needs to get close to -2 to signal a recession. Lowest it has been this expansion is about -0.8.

Foreign Investment In U.S. Homes Drying Up

The housing market has been weak in 2019 mostly because it became unaffordable to American buyers last year. That’s not the only reason though. There is also pressure from foreign buyers, principally from China.

Dollar volume of homes bought by foreign buyers between April 2018 and March 2019 declined 36% from the previous year. Foreigners bought 183,100 houses valued at $77.9 billion in the most recent 12 month period.

In the prior year, there were 266,800 purchases valued at $121 billion. Median house price fell from $290,400 to $280,600. But it’s still above the median for all existing buyers which is $259,600.

This decline is being caused by China which had a 56% decline in purchases. They bought $13.4 billion in properties which is the highest out of any country for the 7th straight year. Number of U.S. listings on the Chinese real estate website Juwai.com fell 27.5% from last year.

As you’d expect, this weakness from China is related to its weakening economy and the trade war. Chinese buyers don’t want to support an economy that is in a trade war with their country. Plus, they don’t want to deal with tariffs and the clamp down on visa processing.

Housing Permits - Conclusion

Decline in housing permits continues the 30 month trend where permits have been range bound. Housing starts have no room to fall. You can’t jump out of a basement window.

The housing market could either be signaling the economy is at risk of falling into a recession in 2020 or it could be just correcting because prices got unaffordable last year.

Decline in Chinese buying also isn’t helping. Even though real residential investment growth has been down for 5 straight quarters, U.S. GDP growth has been very solid.

It will be helped slightly in Q2 by residential investment. A rebound in residential investment in the next few quarters would help the economy avoid a recession.

Spread the love

Comments are closed.