Are Housing Permits Flagging A Recession?

Today, housing starts data exceeded estimates, driven by strong demand for multifamily units. However, housing permits reached a cycle low, as job losses are now being reported in the residential construction sector. Could 6% mortgage rates save the housing cycle as they did in 2023? History suggests it’s possible, but getting there will be challenging.

Housing starts and permits

Let’s take a look at the housing starts report today and see what it is telling us.

From Census:
Building Permits: Privately-owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 1,354,000. This is 2.8 percent below the revised June rate of 1,393,000 and is 5.7 percent below the July 2024 rate of 1,436,000.

Housing Starts: Privately-owned housing starts in July were at a seasonally adjusted annual rate of 1,428,000. This is 5.2 percent (±14.7 percent)* above the revised June estimate of 1,358,000 and is 12.9 percent (±13.6 percent)* above the July 2024 rate of 1,265,000.

Housing starts have increased due to the push from 5-units, although they were starting from a very low level. At this point, any improvement in supply is welcome. I believe in time that lower mortgage rates will positively impact the single-family construction sector. We observed a slight indication of this in the report, and since then, mortgage rates have decreased even further.

This is a positive development, especially if we can reach a rate around 6%. As shown in the chart below, single-family construction has been adversely affected by higher rates, but we can revive this sector.

Residential jobs are already being lost

A key focus of my economic analysis has been monitoring the labor market for residential construction workers. As shown in the data below, we are seeing a downward trend, which is not a positive sign for the U.S. economy. However, there are ways to reverse this trend.

My primary focus is on residential construction workers, including those involved in single-family homes, multifamily units and remodeling projects. There has been a consistent decline for four consecutive months in this sector. A similar trend occurred in 2023, but when mortgage rates dropped to around 6%, the trend reversed, and single-family permits began to increase again.

Conclusion

Today, I appeared on CNBC to discuss housing starts and reiterated my point: we don’t need mortgage rates at 3%, 4%, or 5% to stimulate growth in single-family housing again. Instead, we need rates around 6%. The data from the past few years supports this. Recently, mortgage rates have fallen, which should have a positive impact on the builder survey next month, although the survey showed little change this week.

So until then, we will keep a close eye on mortgage rates, new home sales activity and hope to see a reversal in construction employment.