By New Deal Democrat
Housing starts are considerably more volatile than permits. In fact, they're about twice a volatile: a 200,000 change in starts is just as likely as a 100,000 change in permits. This morning, reported housing starts were up +224,000 YoY. But the biggest change in permits in the last 6 months has been +107,000 YoY in November.
As I wrote last year, 16 of 21 times since the end of World War 2, an increase in interest rates of 1% or more has led to a decrease of -100,000 in housing permits (a 17th time, in 2001, the change was -62,000). In January, I examined the exceptions to the rule, finding that they typically involved scenarios where the saying, "Buy now or be forever priced out" was a powerful scenario.
A lot of the commentary today has focused on how much of the increase in housing starts in April was multifamily (5+ units) vs. single family homes. In view of that, I thought I'd go back and examine how single family vs. multifamily permits and starts played out both in general and during those 4 "exceptions to the rule" periods over the last 50+ rules.
And it turns out this time really isn't different. On all 4 occasions where an increase in interest rates did not lead to a significant decrease in overall housing starts, the effect on single family vs. multifamily units was - unlike most periods - profoundly different.
Below are 4 graphs, showing housing permits for single family homes (blue), multifamily units (green) vs. interest rates measured by 10 year treasuries (inverted so that an increase shows as a negative, red). The first three are measured as YoY% changes in 20 year or so increments. The 4th is measured in changes of 100,000 units, focused on the last 10 years:
If you click on the first three graphs and examine them, you'll find out that typically single and multifamily permits move in unison. With the exception of 1994, all of the other exceptions -- 1962, 1967-78, 1978, and 2004-05 -- coincided with significant increases in interest rates.
In other words, the first sign of stress in the housing market due to rising interest rates has generally been a shift from single family to multifamily building. And that is what has happened in the last year as well, as single family permits have actually turned negative YoY in the last few months. It is the multifamily segment (as you recall, rental vacancies are at all time lows on the order of 3%, and rents have outpacing inflation since the beginning of 2013), which is holding up the market.
In the prior "exceptions to the rule," eventually housing permits and starts followed interest rates. I still think the best rule of thumb is that "it's not different this time."