Building Permits Tumble In June - Are The Low Interest Rates Helping?

The housing starts and building permits report is one of my favorite data points on the housing market and can also be one of the earliest leading indicators in the economy.

The trends in housing starts and building permits provide critical information into the construction sector of the economy. Declining trends in housing starts and building permits can foreshadow slowing employment and wage growth.

While both housing starts and building permits are reliable data points, I focus on building permits which are simply approvals to start a new construction project and not sensitive to weather conditions like an official housing start can be.

While I look at both metrics, for consistency, I tend to only report on permits each month. Building permits are one component to a broad basket of long-leading economic data points. 

Total building permits declined a sharp 6.1% month over month, falling far more than the consensus estimate of a 0.1% gain. The total number of building permits was projected to be 1.3 million units on a seasonally adjusted annualized basis but was reported for the month of June at just 1.22M. 

US Building Permits:Source: Census Bureau, EPB Macro Research

The total number of building permits now sits roughly 13% from the peak of the cycle (March 2018). 

Single-family permits, which in recent months was the laggard, actually ticked higher to 813K. 

Single-family permits are roughly 8% from the peak of the cycle, a magnitude which is consistent with past economic downturns. 

US Single-Family Building Permits:Source: Census Bureau, EPB Macro Research

The weakness this month, which is somewhat worrisome, was concentrated in multi-family permits which declined sharply to a reading of 407K. 

US Multi-Family Building Permits:Source: Census Bureau, EPB Macro Research

Of note, however, is that 2-4 unit building permits actually rose month over month. The major decline this month was concentrated in 5+ unit permits which declined to 360K. 

US Multi-Family Building Permits (5+ Unit):Source: Census Bureau, EPB Macro Research

When analyzing either a composite index or a single data series, looking at the magnitude of the change, the breadth of the move and the persistence of the move is critical. 

In the example of building permits, the nominal peak was in early 2018 for the total number of permits and even earlier for single-family permits which means this decline has been persistent for roughly 18 months. 

The total number of permits is down roughly 13% from the peak of the cycle which speaks to the magnitude of the contraction. We can then stack up this current decline against past slowdowns for comparison. 

Lastly, the breadth is important. In recent months, most of the decline was concentrated in single-family activity which was problematic but this month added another layer with multi-family units declining. 

It will be important to watch this data series over the next several months. Large monthly declines like we just saw in this report can get revised away next month or corrected should this decline have been a result of a one-off event. 

Regionally, the Midwest has been trending lower in terms of building permit activity since 2017 and continued to fall in June, in the face of lower interest rates which was a supposed tailwind for the housing sector.

US Building Permits - Midwest:Source: Census Bureau, EPB Macro Research

The Southern region, the largest area of the housing market by volume was also the strongest region for a long period of time. This month, the Southern region also noted a large decline in building permit activity which now sits roughly 17% below the peak of the cycle.  

US Building Permits - South:Source: Census Bureau, EPB Macro Research

In growth rate terms, single-family building permit activity in the South has been trending lower since 2017 and has been in contractionary territory for most of 2019, again, despite the lower interest rates. 

US Building Permits - South Growth Rate (%):Source: Census Bureau, EPB Macro Research

The building permit report is a reliable data series but subject to revisions and large monthly volatility, qualities shared by most available data. 

Building permit activity often provides a long lead time over cycle peaks and troughs and the trending direction of permit activity, now spread across single and multi-family units, is one that continues to corroborate the view of a cyclical downturn. 

Evidence of a recession remains insufficient yet both the long leading and short leading data are not suggestive of a persistent upturn in global or domestic data through year-end.