Building permits and future housing volumes
Building permits are used to predict future housing volumes. However, they have less predictive power than housing starts, which we discussed in the first part of this series.
The time between the permit and the start can vary greatly. In July 2016, building permits were more or less flat at 1,152,000.
Single-family permits versus multifamily permits
Overall, permits for single-family residences fell from 738,000 to 711,000. Multifamily permits rose from 386,000 to 411,000. The Midwest and the South reported growth, while the Northeast and the West reported decreases in permits.
Implications for homebuilders
We’re hearing evidence from homebuilders and other participants in the sector that traffic is up this year. That said, buyers are still being very cautious about pricing. They aren’t overreaching, even though lower rates increased affordability.
The issue has been a problem of low inventory, combined with low wage inflation. Historically, wages and home prices have correlated very tightly. That correlation has broken down since 2000.
However, margins have been falling because builders have pushed price increases as far as they can. In fact, Toll Brothers (TOL) reported a decrease in its average selling price for the third quarter. D.R. Horton’s (DHI) margins increased after stagnating for a year. PulteGroup (PHM) is another large builder with exposure at the lower price points. PHM reported declining gross margins.
Lennar’s (LEN) margins also fell. It looks like builders will need to start pushing through more volume if they want to show growth in their top line. We’re also seeing merger activity in this space. Recently, The Ryland Group and Standard Pacific closed a merger to become CalAtlantic Group. Investors who want to invest in the entire homebuilding sector can look at the SPDR S&P Homebuilders ETF (XHB).
These trends look good for the overall economy. Construction employs a lot of people and has a huge multiplier effect.
In the next part of this series, we’ll look at homebuilder sentiment.