Is the Drop in September Building Permits Cause for Concern?

Building permit data is used to predict the health of the housing industry (REM). An increase in the number of building permits is an indication of higher activity in the housing sector (ITB). The building permits, however, have a lower predictive power than housing starts (see the first part of this series).

In September 2017, building permits were at a seasonally adjusted annual rate of 1.215 million—a fall from the August reading of 1.272 million and 4.3% below the September 2016 rate.

Although there has been a drop of 4.3% in the overall permits in September, housing permits for single-family homes remained stable. Housing permits for single-family units rose 2.4% in September, up by 9.3% from the previous year.

Remember, growth in single-family units is encouraging because it’s considered to have a better impact on the economy than multi-family units.

Despite some slowdown in the housing sector in recent months, homebuilding companies impressed markets with their earnings. The NAHB (National Association of Home Builders)-Wells Fargo HMI (Housing Market Index) report includes builder confidence about single-family home sales, sales expectations for the next six months, and the traffic of prospective buyers. All the three indicators were reported above 50—a positive sign—and have gained over the previous month.

Notably, companies in this space have appreciated considerably, with KB Home (KBH) gaining 73%, Lennar (LEN) gaining 35%, and Toll Brothers (TOL) gaining 51% over the past year. Realtors continue to expect higher demand in coming months, and the sector could witness higher demand as economic conditions in the US keep improving.