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Housing Permits a Leading Indicator? Of What?

Blame the Weaher

Econoday made this claim: "Starts can be affected by weather which along with related adjustments are always factors for this reading in the winter months."

It's amusing how economists never seem to know what the weather "was" until economic reports come out a month later.

"Very Solid Report"

What really caught my eye was Econoday's opening gambit.

"A surprising but perhaps one-time drop in single-family starts masks what is otherwise a very solid housing starts and permits report for December. ... But the backlog behind future starts continues to build as permits came in very strong, virtually steady at a 1.302 million rate and showing a noticeable 1.8 percent gain for single-family permits to 881,000."

Leading Indicators

The Consumer Conference Board's list of Leading Indicators" rel="noopener noreferrer">Leading Indicators contains housing permits, the S&P 500, the yield curve, IMS, weekly earnings, M2, and the University of Michigan's Consumer sentiment report.

Permits a "Backlog of Future Starts"

Let's investigate the claim in pictures.

Starts vs Permits

https://s3-us-west-2.amazonaws.com/maven-user-photos/mishtalk/economics/zmfATcSa4EegwR7v_znq6Q/1C4aneqiQ0S_ryAB4kOkrg

 

Starts vs. Permits Synopsis

  • Permits are not a leading indicator of starts.
  • If there are sales, homebuilders will start homes.
  • If there are not sales, homebuilders will not start construction no matter how many permits they have.

Starts vs. Permits - Percent Change from Year Ago

https://s3-us-west-2.amazonaws.com/maven-user-photos/mishtalk/economics/zmfATcSa4EegwR7v_znq6Q/my0vjlDOKkG9EIo3yHxJaQ

Although permits are required to do a start, permits do not represent a "backlog behind future starts".

In fact, year-over-year spikes in permits tend to be a lagging indicator.

By Mike Shedlock

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