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Building permits jump while housing starts fall

Building PermitsEnlarge GraphBuilding permits are a critical predictor of future home builder sales

Building permit and housing start data are released jointly by the Census Bureau and the Department of Housing and Urban Development. Analysts use the information to anticipate future production for home builders, future demand for raw materials, and labor costs. This data will even affect the forecasts for home-related retailers, like Lowe’s and Home Depot. Building permits cover the number of privately-owned housing units that were issued permits in a given period.

Both single family and multi-family permits increased

Unlike the related housing start data, where starts for both multi-family projects and single family permits fell, permits for both categories rose. Multi-family permits were 266,000 in April and rose to 374,000 in May. Single-family permits rose modestly from 599,000 in March to 617,000 in April.

Geographically, permits increased the most in the Midwest, where they jumped from 139,000 to 170,000. The South and West increased, while the Northeast fell.

Right now, there is a boom for rental properties as institutional investors chase the high single-digit rental yields that are available. This is making life more difficult for young adults who find themselves most vulnerable in the job market and are competing with the likes of Blackrock (BLK) and Blackstone (BX) for starter homes. Perhaps the drop in multifamily permits means that the rental construction boom is getting played out.

Implications for home builders:

Today’s report had a negligible impact on the performance of the Home Builder ETF (XHB), which was up modestly with the market. Perhaps investors were focused more on the housing starts number, which was good for home builders on a headline basis, but not as much when you look into the internals. Home builders compete with rentals for new household formation, and as the supply of rental properties increases, rents should fall relative to house prices. This will negatively affect new home pricing at the margin. Home builders, like Lennar (LEN), KB Homes (KBH), Toll Brothers (TOL), and NVR, will feel the impact of an increasing supply of rental properties. Offsetting this effect will be the current low inventory level.

Right now, the difference between renting and buying is about the widest it has ever been. When one considers the difference between median house prices and median rents, purchasing is cheaper. Rock-bottom interest rates and low prices for starter homes are making home ownership very affordable. As the job market improves for younger adults, those that are currently renting will contemplate home ownership. The Obama Administration has been pushing banks to lend more and to use FHA loans for first-time home buyers. FHA loans require only 3.5% down, so they are perfect for the first time buyer. This move from renting to purchasing will help home builders in the long-term.