Apartment permits are back to recession lows. Will mortgage rates follow?

Key Takeaways:

– Privately-owned housing units authorized by building permits in February were at a rate of 1,518,000, showing an increase from previous months
– The housing cycle has been unique, with housing permits, starts, and new home sales falling for a while
– Housing completions in February were at a rate of 1,729,000, with a focus on 5-unit completions
– Housing starts in February were at a rate of 1,521,000, showing a divergence in the marketplace between apartment construction and single-family housing
– Mortgage rates may go lower soon due to early recessionary data lines in the housing market
– Builders have been paying down rates to keep construction workers employed, but challenges may arise if rates increase
– Critical Federal Reserve meeting may impact future housing trends.

HousingWire:

From Census: Building Permits: Privately‐owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 1,518,000. This is 1.9 percent above the revised January rate of 1,489,000 and 2.4 percent above the February 2023 rate of 1,482,000.

When people say housing leads us in and out of a recession, it is a valid premise and that is why people carefully track housing permits. However, this housing cycle has been unique. Unfortunately, many people who have tracked this housing cycle are still stuck on 2008, believing that what happened during COVID-19 was rampant demand speculation that would lead to a massive supply of homes once home sales crashed. This would mean the builders couldn’t sell more new homes or have housing permits rise.

Housing permits, starts and new home sales were falling for a while, and in 2022, the data looked recessionary. However, new home sales were never near the 2005 peak, and the builders found a workable bottom in sales by paying down mortgage rates to boost demand. The first level of job loss recessionary data has been averted for now. Below is the chart of the building permits.

On the other hand, the apartment boom and bust has already happened. Permits are already back to the levels of the COVID-19 recession and have legs to move lower. Traditionally, when this data line gets this negative, a recession isn’t far off. But, as you can see in the chart below, there’s a big gap between the housing permit data for single-family and five units. Looking at this chart, the recession would only happen after single-family and 5-unit permits fall together, not when we have a gap like we see today.

From Census: Housing completions: Privately‐owned housing completions in February were at a seasonally adjusted annual rate of 1,729,000.

As we can see in the chart below, we had a solid month of housing completions. This was driven by 5-unit completions, which have been in the works for a while now. Also, this month’s report show a weather impact as progress in building was held up due to bad weather. However, the good news is that more supply of rental units will mean the fight against rent inflation will be positive as more supply is the best way to deal with inflation. In time, that is also good news for mortgage rates.

Housing Starts: Privately‐owned housing starts in February were at a seasonally adjusted annual rate of 1,521,000. This is 10.7 percent (±14.2 percent)* above the revised January estimate of 1,374,000 and is 5.9 percent (±10.0 percent)* above the February 2023 rate of 1,436,000.

Housing starts data beat to the upside, but the real story is that the marketplace has diverged into two different directions. The apartment boom is over and permits are heading below the COVID-19 recession, but as long as the builders can keep rates low enough to sell more new homes, single-family permits and starts can slowly move forward.

If we lose the single-family marketplace, expect the chart below to look like it always does before a recession — meaning residential construction workers lose their jobs. For now, the apartment construction workers are at the most risk once they finish the backlog of apartments under construction.

Overall, the housing starts beat to the upside. Still, the report’s internals show a marketplace with early recessionary data lines, which traditionally mean mortgage rates should go lower soon. If housing leads us into a recession in the near future, that means mortgage rates have stayed too high for too long and restrictive policy by the Fed created a recession as we have seen in previous economic cycles.

The builders have been paying down rates to keep construction workers employed, but if rates go higher, it will get more and more challenging to do this because not all builders have the capacity to buy down rates. Last year, we saw what 8% mortgage rates did to new home sales; they dropped before rates fell. So, this is something to keep track of, especially with a critical Federal Reserve meeting this week.

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Property Chomp’s Take:

Hey there! Let’s talk about the latest data from the Census regarding building permits, housing completions, and housing starts.

So, according to the Census, building permits for privately-owned housing units in February were on the rise. This is great news as it shows a positive trend in the housing market. People often say that housing leads us in and out of a recession, so tracking housing permits is crucial in understanding the economic landscape.

Now, some folks are still stuck on what happened in 2008 during the housing crisis, but the current housing cycle has been unique. The data from 2022 did look a bit recessionary, with housing permits, starts, and new home sales falling. However, the builders managed to find a way to boost demand by lowering mortgage rates, which helped stabilize the market.

When it comes to apartment construction, the boom and bust have already happened. Permits are back to COVID-19 recession levels, but this doesn’t necessarily mean a recession is imminent. A recession usually occurs when single-family and 5-unit permits fall together, not when there’s a gap like we’re seeing now.

Moving on to housing completions, we saw a solid month in February, driven by 5-unit completions. This increase in supply of rental units is good news for tackling rent inflation. More supply means a better chance at controlling inflation, which also bodes well for mortgage rates.

As for housing starts, they beat expectations in February. The marketplace has diverged into two different directions, with the apartment construction sector facing more risks than single-family homes. If single-family construction falters, we could see a downturn in residential construction employment.

Overall, the housing market is showing early recessionary data lines, which could mean lower mortgage rates in the near future. The Federal Reserve plays a crucial role in shaping the economic landscape, so it’s essential to keep an eye on their upcoming decisions. Builders have been managing to keep rates low to sustain construction jobs, but if rates rise, it could pose challenges for the industry.

In conclusion, the housing market is a key indicator of economic health, and the current data suggests a mixed outlook. Keeping track of these trends will help us navigate the ever-changing landscape of the housing market.