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Should Housing Investors Worry about Declining Building Permits?

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May. 30 2018, Updated 7:32 a.m. ET

The housing industry and building permits

The United States Census Bureau and the Department of Housing and Urban Development report monthly data on building permits issued in the United States. Tracking changes to the number of building permits issued gives investors insight into the demand and supply conditions in the housing (REM) industry.

An increase in the number of building permits in any given month is a signal for increased activity in the housing sector (DHI) in the future, as construction (ITB) activity begins after a few months of the issuance of a permit. This attribute makes the number of permits issued a reliable forward indicator for the sector and the economy.

As per the recent report, housing units (XHB) authorized by building permits were at a seasonally adjusted rate of 1.4 million, a minor fall of 1.8% from the revised March reading of 1.4 million units.

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Single-family versus multifamily housing permits

The decrease in building permits, as in the case of housing starts, was because of the decline of permits issued for multifamily units. As per the latest report, building permit authorization for single-family homes increased 0.9% to 859,000 units in April compared to the revised March reading of 851,000. Multifamily unit authorizations decreased 7.4% from 486,000 units to 450,000 units. The annual growth rate in permits, however, remained high, with the number of overall permits increasing 7.7% compared to the previous year.

The outlook for the housing sector

The fall in the number of permits issued shouldn’t be a reason to worry, as the declines were in volatile multifamily units. Industry (PKB) insiders’ optimistic view comes from the continued growth in single-family housing, where the number of homes under construction was at its highest level in a decade. Once these units are off the market, there could be further scope for increased permit applications. In the next article, we’ll analyze the bounce back of existing home sales in March.

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