Wednesday, July 20, 2011

Sssshhhhh - did we just have good housing data?

With the markets currently wholly dictated to by to-ings and fro-ings on several debt issues around the globe, its largely gone un-noticed that the weekly/macro data is still ongoing and can give us some clues as to what is going on with the economy.

Yesterday's release included the Building Permits and Construction starts data in the US. As a reminder, the building permits is a monthly data that shows the annualized number of permits for new construction projects issued by the Government. Housing Starts is also released monthly, and shows the annualized number of new homes that began construction in the given month. Yesterday, the June data was released. Housing permits: 624,000 and housing starts 629,000.

So why is that good news?

The graph above shows the housing permits and starts over the last 10 years. The 2006 peak, 2009 trough decline of 1.5 million was of epic proportions, in the sense that it was the 3rd worst decline on a population adjusted basis in the last 85 years. However, we have seemingly been bouncing along the bottom since then. At the peak, the housing sector was a major source of growth for the economy; the decline since then has contributed in no small part to the weak growth and high unemployment. However, with the passing of time, slowly but surely it is no longer a drag on the economy. Its not much of a growth booster either, but at least its not a drag. We have been bouncing along the bottom, sort of in neutral territory. .

Remembering though that being that the data is a monthly reading, it is quite "noisy". If we were to zoom in to the housing permits since the end of 2008, but averaging the monthly reading to give a quarterly reading to smooth out the noise, we would get the following graph:

We can see that after an improvement of 125,000 between the beginning of 2009 and the beginning of 2010, most of that gain (100,000) was subsequently given back in the following year. Analyzing post world war 2 housing recessions, it is fair to state that it takes about a year to a year and a half for the full effect of a housing decline to ripple its way through the rest of the economy. With the most recent decline ending in June 2010, it is also fair to say that we may well be close in time for that decline to have been fully felt. With yesterdays, strong readings, the Q2 2011 housing permits and starts, will average over 600,000 (the above graph as taken from the Fed's website ends Q1 2011). That would make it the best quarter for over a year.

True, it may be a one off wonder. However, the difference with the 2009 advance, is that this one is without the artificial stimulation of a housing credit stimulus.

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