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January home sales, starts, permits, and prices: Key takeaways

Part 3
January home sales, starts, permits, and prices: Key takeaways (Part 3 of 4)

Why single-family has held up despite falling building permits

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 fell to 602,000, with multi-family permits dropped to 309,000. In December, single-family permits totaled 610,000 and multi-family permits totaled 309,000.

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

Implications for homebuilders

The report had a negligible impact on the performance of the Homebuilder ETF (XHB), which was down modestly. The market seems to be focusing on upcoming homebuilder earnings and the spring selling season. Certainly 4Q homebuilder earnings were good pretty much across the board—with Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), and Toll Brothers (TOL) reporting big increases in revenues and average selling prices.

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. Mel Watt, the head of FHFA, plans to change Fannie Mae and Freddie Mac overlays to encourage more lending, especially to lower-income and first-time homebuyers. That said, an extension of the HARP program deadline appears not to be in the cards.

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