What to Make of the Decline in Building Permits in May

The housing industry and building permits

The US Census Bureau and Department of Housing and Urban Development report monthly data on building permits issued in the United States. The changes to the number of building permits issued every month give investors an idea about the trends in the housing (REM) sector. The number of building permits issued every month also acts as a forward indicator for the economy because 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 issuing the permit.

As per the June report, housing units (XHB) authorized by building permits were at a seasonally adjusted rate of 1.30 million, a decline of 4.6% from the revised April reading of 1.36 million units.

What to Make of the Decline in Building Permits in May

Single-family versus multifamily housing permits

The decrease in building permits in May was primarily because of the decrease in permits for multi-family units. As per the latest report, building permit authorization for single-family homes has decreased 02.2% to 844,000 units in May as compared to the revised April reading of 863,000 units. Multi-family unit authorizations have decreased by 8.5% from 460,000 units to 421,000 units. The annual growth rate in permits, however, remains high with the overall permits increasing by 8.0% as compared to the same period in the previous year.

The outlook for the housing sector

The decline in the number of permits in May is not a reason to worry, as permits tend to be volatile when the data is observed monthly. Though builders (PKB) have been complaining about a shortage of workers and increasing input costs, the appetite for housing from consumers is on the rise thanks to low unemployment and higher wages. Plus, the number of houses under construction is at a multi-year high, indicating that builders could apply for permits once these under construction units are off the market. In the next part of this series, we’ll analyze the decline of existing home sales in May.