Housing Starts Sink as Permits Soar in December

The home builders get some good news and bad news today. Here's the bad news first: housing starts sunk 4.3% in December to their lowest level since October 2009. The good news, however, is that permits, a more forward-looking indicator, rose a surprising 16.7% to the highest number seen since March 2010. What does today's Census Bureau report say about the demand for new homes?

Before analyzing the numbers, let's look at a few charts. First, here's some history for housing starts, which are new homes that broke ground during a month:

housing starts 2010-12.png

As you can see, they appear to be settling just above 500,000, which is a very low level of new home building activity on a historical basis. Last month's 529,000 annualized starts fell short of the 545,000 that economists expected.

But look at how new permits popped in December:

housing permits 2010-12.png

That's the steepest increase since June 2008. Permits hit 635,000 during the month.

There are a few ways to interpret today's report. One is to merely brush the permits number off as a blip. Perhaps builders rushed to get permits in before year end. While an interesting theory, other Decembers don't show similar jumps. Still, if you do look back at June 2008, you see that after permits rose by 18.6% that month, they fell 21.9% in the month that followed. So it's likely difficult for the home building industry to get excited about this jump in permits before a real trend forms. December may have simply been an outlier.

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Yet it is certainly possible for permits to begin trending up while starts remain low. After all, permits are a leading indicator. Ground isn't broken on homes until permits are in place. So home builders may be cautiously optimistic that permits' rise is legitimate, and starts will also increase in coming months.

It's important to have some perspective here, however. As the second chart above shows, even December's seemingly big jump in permits leaves them at a very depressed level compared to what was seen over the past decade. Home building activity will have to increase a lot more than this to start to bring back a significant portion of the nearly two million construction jobs lost since the recession began. With home inventory still high and distressed properties still at an elevated level, it's hard to see why Americans would demand many additional new homes over the next few years.