Building permits for private housing units in the US dropped by 5.5 percent in August, which was the largest drop recorded in more than two years. The last time housing permit activity dropped by a larger amount was during June of 2016 when permits fell by 12.3 percent.
The trend in all permits (seasonally adjusted):
The decline was driven by a drop in multifamily permits. In fact, single-family permit growth didn’t drop below zero at all — although single-family permits grew at the weakest rate (2.1 percent) recorded since May of 2014.
The trend in single-family permits (seasonally adjusted):
If you’re like me, though, you’re not a huge fan of seasonally-adjusted numbers. So let’s look at the non-adjusted permit totals.
Given that permit activity does tend to be highly seasonal, it’s helpful to compare this past August with other Augusts. So, if we look at each month of August since 2005, we find that August 2018 was the first August in eight years during which permit activity (for all units) actually turned negative when compared to the previous August. August 2018’s permit activity was down 5.9 percent, year over year.
Total permits reported for August of each year:
As with the seasonally-adjusted data, the decline was driven largely by a drop in multifamily permits. Looking at permits for building with 5 or more units, we find that permit activity in August 2018 was down 21 percent from the previous August. To find a larger drop in August, we have to go back to 2009.
Multifamily permits reported for August of each year:
Meanwhile, single-family permits were up by 1.6 percent in the non-adjusted data, comparing August 2017 to August 2018. This was the smallest August increase in single-family permits in four years. Nevertheless, it was an increase.
In short, we’re seeing a similar trend in the August non-adjusted data that we see in the adjusted data: single-family permits are more or less flat, and growing at a weak rate.
Unlike single-family permits, though, multifamily permits aren’t growing at all, and in August, they dropped off by the largest amount seen since the last recession.
Why Might Permit Activity Be Dropping?
Given that permits tend to be an indicator of future building activity, these numbers suggest that builder confidence is slipping. This could be due to at least two factors. One factor is likely rising mortgage rates . In August, the average 30-year fixed rate was the highest it has been since 2011. That’s likely to put downward pressure on demand for both single-family homes and condos in multifamily buildings.
Secondly, thanks to the Trump tariffs, the cost of both lumber and steel has risen, driving up construction costs. This means builders won’t be able to deliver units at a prices that are likely to attract as many buyers as might have been the case without the tariffs.
On the other hand, it’s possible that the weakness in the August numbers are a fluke and and that permit activity will bounce back. If both construction and borrowing costs continue to go up, though, sustaining demand will require greater growth in incomes.
This article originally posted here.