Housing Starts Boom in April, But New Building Permits Fall

The housing market has stabilized. In fact, it’s safe to say that it’s rebounding. After being hammered for three consecutive years through early 2009, the trend is again friendly in housing construction. But the number of new building permits issued fell sharply last month. Is the nascent recovery in housing starts destined to follow?

If we focus on housing starts alone, the trend is certainly clear. Privately-owned housing starts rose nearly 6% last month to a seasonally adjusted annual rate of 672,000. That’s more than 40% higher than the year-ago level. As business and accounting professor Esme Faerber wrote in All About Bonds, Bond Mutual Funds, and Bond ETFs, “strength in housing starts shows consumer confidence in the economy.” And so it does in 2010. As we reported last week, retail sales rose in April for the seventh consecutive month.

What, then, are we to make of the steep drop in new permits issued? Is it merely statistical noise? Or is it an early warning sign that the recovery in housing construction of late poised to slow, or even reverse? In that case, the wider economic recovery may face a growing risk of stalling. Ongoing weakness in building permits would surely raise that specter. Indeed, the trend in permits is considered to lead housing starts, according to Professor Mark Hirschey in his textbook Fundamentals of Managerial Economics.

That relationship has remained intact over the past 12 months or so. For the year through March, permits jumped by 31%, well above housing start’s 22% climb. But permits tumbled nearly 12% last month, the biggest monthly drop since the darkness that was December 2008. As a result, last month’s tally of new building permits issued was the lowest since October 2009.

Is there a crack forming in the budding housing recovery’s foundation? Too soon to say, although the trend in permits in the months ahead deserves close attention. As with so much of the economic rebound over the past year, the stress test of endurance is the year ahead, rather than the year that’s just passed. Bouncing off the bottoms of economic cycles is one thing; sustaining the bounce is something else. At least one pair of dismal scientists is wary of what comes next:

“The increase in demand prompted by the tax credit has lifted [housing] construction, but the expiration of the credit on April 30 has made home builders wary about continuing to add new homes during the summer,” wrote economist Ian Shepherdson at High Frequency Economics, according to Marketwatch.com.

“We think the pace of the housing recovery will be modest at best,” Jonathan Basile, an economist at Credit Suisse, told Bloomberg BusinessWeek. “It’s encouraging to see starts gain some traction but the decline in permits takes some of the luster off.”

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

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