Is the Uptick in New Building Permits A Sign of Things to Come?

The housing market has shown signs of recovery before, but to date it’s come to naught. Is there any reason to think that the latest rise in new building permits issued offers real hope this time? Unlikely, but the trend bears watching just the same.

New building permits ticked up sharply last month, the Census Bureau reports. The 16.7% rise in December is the highest monthly percentage increase in more than two years. Permits are considered a leading indicator that offers clues about the future. Permits, howver, aren’t a perfect measure of things to come. We’ve been here before, only to find disappointment. In June 2008, housing starts surged by nearly 19%. It turned out to be a statistical glitch, and the housing market resumed its descent in the months ahead.

But that was then. What’s changed since 2008? For one thing, the Great Recession isn’t raging as an all-out force of darkness. The blowback from the contraction still hobbles the housing market and other corners of the economy, but growth has a stronger footing, at least compared with 2008. Will that be enough to overcome the real estate’s markets various headwinds? Maybe, although it’s going to take a lot more digging to climb out of this hole. And even if permits have started to climb, that’s only one statistic in an otherwise gloomy marketplace.

As the chart above reminds, new housing starts continued to slump in December. In fact, starts continue to bounce around near all-time lows. This forward-looking measure of the housing market isn’t dead, but it’s still deep in slumber.

Some analysts say that housing is in the throes of an outright depression that will last for years. That’s probably going too far, but not by much. Nonetheless, the breadth of the headwinds in housing inspires the expectation that last month’s surge in newly issued permits is simply statistical noise rather than a sign of an impending turnaround.

“With sales still near record lows and a lot of unsold properties in the market, there’s very little reason for builders to add more homes to the supply,” Sal Guatieri, a senior economist at BMO Capital Markets, tells Bloomberg. “Housing remains a key downside risk to the economy.”

The challenge of housing is compounded by the still-weak growth in the labor market. Then again, compared with housing, it’s easier to be optimistic on the outlook for job creation. The Fed certainly is. According to the central bank’s Beige Book report released last week, “Labor markets appeared to be firming somewhat in most Districts, as some modest hiring beyond replacement was said to have occurred and/or was planned in a variety of sectors.”

Finding similarly optimistic observations for housing is quite a bit tougher these days, even after a five-year bear market in real estate. The best you can say with any confidence is that the housing correction appears to have stabilized, albeit at sharply lower levels compared with the pre-2006 era.

As for the upturn in permits, that’s encouraging, as far as it goes, but it’s going to take a lot more to convince the crowd that the housing market’s ready to grow again on a sustainable basis. Don’t hold your breath. With foreclosures still running high, job creation sluggish, and excess inventory keeping a lid on prices, this industry is still looking at a long, slow recovery—and that’s the optimistic view.

“We wouldn’t be shocked to see home prices drop another 5% this year before starting to rebound,” says Rick Sharga, a senior vice president at RealtyTrac via TheStreet.com. “Really, until you start to see the inventory levels start to become more manageable, it’s going to be difficult to see the housing market come back appreciably.”

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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