Before a construction company begins building residential housing units, they first have to file permits with their local building permit officials. Housing permits tell us how many New Privately Owned Housing Units have been allowed to be built.
Housing Permits are calculated by the U.S. Census Bureau. The calculation is based on the number of permits issued by jurisdictions that frequently issue permits, and estimates by the Bureau of permits from jurisdictions that issue permits less frequently, don’t respond or refuse to participate. The report provides details on three different segments of permits, the single-family segment makes up most of the data, the five units or more segment includes apartment buildings, and the smallest segment is the two to four housing units. In addition, the report provides permit data for the four regions in the U.S.: The Northeast, the Midwest, the South and the West. The report is published on the 12th workday of each month within the New Residential Construction press release. The report also contains housing starts and housing completions, which lag permits because actual construction or “shovels in the ground” occur after the jurisdictions allow construction. The Census provides construction data so that Congress, policymakers, as well as business and community leaders have the information they need to make informed decisions that shape the economy.
The report helps to gather or provide information surrounding difficult or hard to gather topics such as the size and breadth of the real estate sector.
Reasons for the report include its help in gathering and communicating information about the real estate sector, wealth indications, capital intensive use levels, interest rate sensitivity and consolidation of information across multiple industries. For example: to build a residential unit, you typically need authorization from your jurisdiction, financing from a bank to pay for the land, materials to build, labor to put the materials together, and durable appliances to go inside the unit once building is complete. This is why housing permits are an important indicator of economic activity, since many moving parts in the economy need to work and coordinate together to accomplish the mission of building a home.
If housing construction is robust, a positive sequence of events is likely to be felt across the economy and gains across many economic data points are expected to occur. If construction activity slows on the other hand, it’s typically an indication of underlying weakness in the economy reflected through one or more of the many variables that influence the real estate sector. If the real estate market slows down in the U.S. like it did during the 2008 financial crisis, it will likely reflect through slowing economic growth and weakness across many economic data points. COVID-19’s effects on the real estate market have been significant. Record low interest rates and the migration of residents from some of the nation’s largest cities towards less densely populated areas have propelled the number of permits to decade highs, levels only reached prior to the 2008 financial crisis.
The desire for homebuilders to supply housing, demand for housing from consumers, and the cost of capital and materials are important variables to analyze when looking at real estate markets. To forecast housing permits look at homebuilder sentiment, expected credit conditions, mortgage applications, and daily commodity prices to get an idea of how builders, banks, consumers and investors feel about the trajectory of the real estate market. Also look at the price action and listen to the conference calls of some of the largest real estate builders, operators and providers. KB Home, Toll Brothers, Lennar, DR Horton, AvalonBay, Equity Residential, Essex Property Trust, Builders FirstSource, Lowe’s and NVR are some to pay attention to.
While not typically a market moving data release, the market will decline further if permits, starts and completions are worse than expected, and rise more if better than expected. More housing construction means more economic activity and an environment that will likely benefit stocks globally.
For a large portion of the world’s population, buying a home is the single largest transaction they’ll ever make. Tracking the capital intensive and interest rate sensitive real estate sector for signs of economic strength or weakness is an important aspect of economic analysis.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.