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| Permits and Starts Data Promising but Beware of Tempting Headlines |
| Written by Jonathan Smoke | |
| 05.16.2008 | |
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Discuss this article on the forums. (0 posts) The Commerce Department reported April permits and starts today. One resulting headline story is one of surprise because total permits were up 4.9% over March’s revised numbers and total starts were up 8.2% over March’s revised numbers. This news could be taken as a positive affirmation of the Wall Street Journal’s report on May 6 that the March starts may have signaled housing’s bottom. That conclusion was based on 35+ years of history that starts below 1 million annually were bottoms of previous downturns. But hold your horses on believing this based on these numbers alone. Look at single unit permits and starts. )) Single unit permits and starts are a far more stable and important indicator of turns in housing as they represent the lion’s share of new construction, and they can be more controlled than multi-unit starts (when you start a multi-unit building, by definition you must start more than one). Every builder I have talked to this year is avoiding any speculative building on the single family side. The name of the game is to discount and sell all inventory homes and pray for pre-sales so that all starts are contracted for sale. That way the primary risk is cancellation, which seems to be decreasing as credit conditions improve and existing home sales pick up. So, in other words, ignore the total headlines and follow single unit stats. There the story is not as compelling a turn-around signal. Single unit permits were up 4% over March with a margin of error of +/-1.4%, which really means that we can be 95% confident that single unit permits were up between 2.6% and 5.4%. So they were up, but not as up as the multiunit permits were. On the starts side it is even less thrilling. Single unit starts were actually reported down 1.7% from March. Like permits, since this is survey based, this stat has a margin of error as well, and it is a whopping 11.7%, which means we can only be 95% confident that the change was between -10% or + 13.4%. In other words, we don’t really know if single unit starts were up or down—there’s too much variance in a limited data set to confirm. So what happened in April? Many multi-unit properties were permitted or started. Of course those are the very properties that developers and builders are most compelled to continue to build even if the market is oversupplied because their capital is tied up in the infrastructure. They are damned if they do, damned if they don’t. Don’t take my commentary here to mean that I do not think things are getting slightly better. I simply don’t trust the hype coming from these numbers. I’d put more faith on more significant trends and especially the movements we are seeing in some markets in the listings side of things. If you take a more measured and scientific approach to following housing, you won’t just guess and you won’t be fooled by a false headline grabbing interpretation of data. 
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