Must-know: Building permits fell but the pipeline is still strong



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.

Multi-family permits decrease while single-family permits increase

Permits for single-family residences fell to 610,000, with multi-family permits basically flat at 350,000. In November, single-family permits totaled 641,000 and multi-family permits totaled 352,000.

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

Implications for homebuilders

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Friday’s 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 3Q 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. 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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