| No Surprise That Starts and Permits Are Down |
| Written by Jonathan Smoke | |
| 09.18.2008 | |
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Discuss this article on the forums. (0 posts) Yesterday the Commerce Department released August permits and starts data. It should not be a surprise to anyone related to the industry that permits and starts were both down at historically low levels. Total building permits in August were at a seasonally adjusted annual rate of 854,000 units, which was 8.9% below the July rate of 937,000 and was 36.4% below the August 2007 rate of 1,343,000. Single-family permits in August were at a rate of 554,000, which was 5.1 % below the July figure of 584,000. The declines in permitting stats were statistically significant. Total housing starts in August were at a seasonally adjusted annual rate of 895,000, which was 6.2% below the revised July estimate of 954,000 units and was 33.1% below the August 2007 rate of 1,337,000. Single-family housing starts in August were at a rate of 630,000, which was 1.9% below the July figure of 642,000. The monthly starts declines were not statistically significant, which means they are within the margin of error for the survey and therefore could have been higher or unchanged—it’s too close to call. When we compare single family permits and starts to new home sales (sales only through July 2008), we can clearly see that starts and permitting have converged to the level of new home sales. That’s why inventories are slowly declining. Remember that a portion of permits pulled are never started and a portion of starts never get finished—essentially new home construction is keeping pace with depressed demand. A further significant inhibitor is the lack of speculative building. In this climate, builders with minimal capital cannot start homes for which they do not have sales contracts. And conservative management of well capitalized builders are also avoiding speculative building—well capitalized builders have had a relentless focus on having no inventories for almost two years now. I know from looking at a few markets in detail lately that the big builders are mostly operating with no finished inventory. So, it should come as no surprise that we are at very low historic levels for permits and starts. Looking at non-seasonally adjusted permit counts for August, the last time single unit permits were lower was in early 1991. Reported starts were actually lower earlier this year. Don’t expect this to change until sales improve and inventories fall to a normal equilibrium level of approximately six to eight months’ of supply. This is a good thing as the market is correcting. Of course, the depressed amount of deliveries and associated construction is hurting every organization involved in supply or building homes, but the good news is that because we are at low levels it will eventually get better. Why Wall Street considered this as part of the horrible news this week is beyond me. The monthly decline wasn’t of Armageddon proportions and it was exactly what we need to be seeing. 
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