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By New_Deal_democrat October 20, 2016 12:17 pm
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September housing starts and permits: clear as mud!
Last Saturday in my Weekly Indicators column I noted that there was a little darkening of the data.  I elaborated on that Monday in this post:
http://bonddad.blogspot.com/2016/10/the-darkening-skies.html
In view of the ambiguous signals from other long leading indicators, I said that housing data this month would take on an added importance.  In general, what I have been looking for is the recent lows in interest rates beginning to feed through into housing mortgages and construction.

So yesterday was the report on September housing starts and permits, and it was clear as mud!  Starts dropped sharply, while permits rose significantly:  


  
Although generally permits slightly lead starts, and are less volatile, in the last year I have paid more attention to starts, and to single family permits, because of a very large distortion in multi-family permits in May and June 2015 due to the expiration of a housing program in NYC.

We've already looked at starts above.  Here are single family permits:

As I've noted in the past, single family permits are just as reliable as permits overall as a long leading signal.  Four previous times in the last 18 months single family permits have been between 738,000 and 741,000 annually (their post-recession high).  Yesterday's report was the fifth time, with a reading of 739,000.  

Another way I have tried to avoid the distortions caused by NYC is to exclude the northeastern region from permits.  Here's what that looks like:

Like single family permits, it is near its high of one year ago, but has not made another one.  (Next week we'll get the state-by-state look.  Until then it is impossible just to exclude NY State).

As I said above, clear as mud!

What I have expected is for housing to follow interest rates.  To recap, here is the long-term correlation between mortgage interest rates (blue, inverted) and housing starts YoY (red):

 
 
This is data that goes back half a century, and virtually always new housing construction follows mortgage interest rates with a 3-6 month delay.
 
Here is a zoomed in view of the last 10 years:
 
 
The huge downturn of the housing bust stands out, followed by a rebound due to lower rates.  At the end of last year, an uptick in interest rates has been followed by a downturn in starts.
 
Here is the same comparison, this time with interest rates measured weekly (blue, inverted) vs. single family permits (red):
 
 
We should be seeing a better YoY increase in permits between now and the beginning of next year.  That would mean new highs in both single family permits, and permits ex-NY state.  If we don't, there is a problem. 
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