Good news for housing? November sales, starts, and permits

Part 3

Building permits fall, but constructions levels are still good

Building permits are a critical predictor of future homebuilder sales

Building permits and housing starts 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 homebuilders, 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.

Building PermitsEnlarge Graph

Multi-family permits decrease, while single-family permits increase

Permits for single-family residences rose to 634,000, while multi-family permits fell to 346,000. In October, single-family permits totaled 632,000 and multi-family permits totaled 391,000.

Geographically, permits increased in the Northeast and Midwest and decreased in the South and West

Right now, there’s 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, have high student loan debt, and are competing with the likes of Blackrock (BLK) and Blackstone (BX) for starter homes. Perhaps the drop in multi-family permits means that the rental construction boom is playing out.

Implications for homebuilders

Yesterday’s report had a negligible impact on the performance of the Homebuilder ETF (XHB), which was up modestly with the market. The market seems to be focusing on the NAHB Homebuilder sentiment survey, which was released the day before and showed homebuilder sentiment at its highest since 2006. Certainly homebuilder earnings were good pretty much across the board—with only PulteGroup (PHM) reporting declines in orders. Other homebuilders like Lennar (LEN), Standard Pacific (SPF), and Meritage (MTH) reported great numbers with large increases in orders and backlog.

Despite the recent increase in interest rates, the value gap between renting and purchasing is still wide. When you consider the difference between median house prices and median rents, purchasing is cheaper. Rock-bottom interest rates and low prices for starter homes are making homeownership very affordable. As the job market improves for younger adults, those who are currently renting will contemplate homeownership. The Obama Administration has been pushing banks to lend more and to use FHA loans for first-time homebuyers. FHA loans require only 3.5% down, so they’re perfect for the first-time buyer. This move from renting to purchasing will help homebuilders in the long term.

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