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By New_Deal_democrat October 19, 2017 10:28 am
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September housing permits and starts: stall continues, where will future growth come from?
Let me start with two introductory comments:

Fist, one disagrees with Bill McBride at one's peril with regard to housing, but I am unable to share in his continued optimistic outlook. Housing sales are driven by three primary factors: 

1. Housing moves inversely, with a lag, to interest rates.

2. Although sales turn before prices, prices are a causative agent driving the turn in sales.

3. Housing moves in sync with demographics, specifically the number of young first time buyers.  

While the third factor is still a positive, interest rates remain a negative YoY for at least one more month. Even then, it does not appear likely that they will approach, let alone make, new lows. Prices meanwhile continue to outpace wage and household income growth. In other words, for the near future, it appears that both the downpayment and the monthly carrying costs for housing will become more challenging for the first time buyers who ultimately drive the market. I just don't see where the impetus for significant new growth in housing sales is going to come from.

Second, last month I cautioned readers to take the good housing permits number with a grain of sailt, since it wasn't confirmed by any other metrics. Yesterday's release of  September housing permits and starts indicates that caution was on point.

Remember that permits are less volatile than starts, and single family permits are the least volatile of all. Starts are best looked at as a three month moving average.

So, first of all, here are total and single family permits:

Both declined. Further, neither one has made a new high since the early months of this year.

Further, when we do our hurricane workaround, and compare the sum of the other three Census Regions unaffected by the recent hurricanes, we get the same result:

In short, the failure to make new highs can't be laid to the hurricanes.

Housing starts are also well off their pace from earlier this year:

and when we look at starts quarterly to cut down on the volatility, we also see the decline:

Finally, we also see the decline when we take out the south Census Region to workaround the hurricanes:

The decline, even at its lowest point earlier this year, has not been severe enough to be consistent with an oncoming recession. 

The relatively bright spot, as I noted last month, is that the relatively deeper slump in starts vs. permits is at least partially explained by comparing housing units that have been authorized, but *not* started overall (blue), vs. single family (red) and multi-unit structures (green):

There are an outsized number of single family houses, on the order of 5% above average for this expansion, that have been authorized but not started in the last 6 months. So I expect starts to pick up somewhat in the coming months.

The September permits and starts report really puts the spotlight on new home sales, which has been somewhat more positive this year, which will be released next week.  It also puts the spotlight on new and existing home prices. Although interest rates have risen, it is likely that the continuing increase in house prices is also finally having an impact on sales.

In the coming months, as YoY interest rates may be positive, I certainly don't rule out new highs in permits and starts. But unless interest rates break towards new lows, or real household incomes break towards significant new highs (due to either surging wage growth or a renewed deflationary pulse), I just don't see the ability for such gains to be very significant.
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