May 2012 Residential Sector Shows Relatively Strong Growth

Written by Steven Hansen

Residential building permits and construction completions in May 2012 continues to show the industry rebound.

  • Building permits have grown year-over-year for the last 13 months;
  • Construction completions have grown year-over-year for 8 of the last 11 months;
  • Building permits have outpaced completions for the last five months.

US Census Headlines:

  • building permit up 7.9% month-over-month, up 25.0% year-over-year
  • construction completions down 10.3% month-over-month, up 10.1% year-over-year
  • the market expected 710K to 719K annualized seasonally adjusted housing permits versus the 780K reported

Econintersect Analysis:

  • Building permits are up 8.0% month-over-month, up 33.2% year-over-year.
  • construction completions are down 15.6% month-over-month, up 9.0% year-over-year.

When more building permits are issued than residences completed – the industry is expanding. The “less bad” / “more good” growth trend line has been positive since 2009.

Construction completions which were not been growing year-over-year since mid-2011, had a growth spasm in the April data. One month is not a trend. However, clearly permits have been trending up since the beginning of 2011.

Other points to take away from the data:

  • Before we start thinking all is well, the residential home industry has shrunk by two-thirds since the home bubble was peaking in 2005.
  • Apartment permits (structures with 5 or more units) grew 51.6% year-over-year (from 42.9% last month). Apartments accounted for 30.9% of all building permits, while only 20.6% of construction completions. In 2005, apartments accounted for only 18% of the housing market, while in 2011 it accounted for 29%.
  • Single family building permits rose 26.2% year-over-year.

Caveats on the use of Building Permits Data

This is a non-monetary index. Recently, the data has had moderate downward revisions one month after initial release. Therefore, the release data this month should not be taken too seriously until next month.

This sector expands when more housing permits are issued than houses completed. The data is not necessarily accurate in real time, however. For 2011, there have been more building permits than construction completions (total over a complete year) for the first year since 2005.

  • 2005 = 225K more permits than construction completions
  • 2006 = 140K more construction completions than permits
  • 2007 = 104K more construction completions than permits
  • 2008 = 214K more construction completions than permits
  • 2009 = 211K more construction completions than permits
  • 2011 = 59K more construction completions than permits
  • 2012 = 25K more permits than construction completions

This data in this series is created by survey – not by hard data:

  • Permits – A monthly survey of 9,000 selected permit-issuing places; and an annual census of an additional 11,000 permit places that are not in the monthly sample. The monthly sample of permit-issuing places was selected using a stratified systematic procedure. All permit places located in selected large metropolitan areas were selected with certainty. The remaining places were stratified by state. Places that exceed a cutoff value, which varies by state, were selected with certainty. Remaining places were sampled at a rate of 1 in 10.
  • Construction Completions – To provide nationwide coverage of building activity, a multi-stage stratified random sample procedure was used to select approximately 900 building permit-issuing offices, and a sample of more than 70 land areas not covered by building permits. Each month, for permit-issuing places, a sample of residential building permits is selected from each of the sampled permit offices. The probability of selecting a permit is proportional to the number of units authorized by the permit. Permits for one-to-four-unit buildings are sampled at an overall rate of 1 in 50. All permits authorizing buildings with 5 or more housing units in the sampled permit offices are selected. Each month, for areas that do not require building permits, field representatives conduct a road canvass in each of the sampled non-permit land areas to identify the start of new buildings. All new residential buildings found are selected for the survey. Once a permit or building is selected, a field representative contacts the owner or builder, by telephone or in person, to conduct the interview each month as necessary. Contact continues until the project is either completed or abandoned. If a single-family home is not sold by the time of completion, the project will continue to be followed until the sale occurs. Each month, interviews are required for about half of the buildings currently being followed up. Each month, housing starts, completions, and sales estimates derived from this survey are adjusted by the total numbers of authorized housing units (obtained from the Building Permits Survey) to develop national and regional estimates. Estimates are adjusted to reflect variations by region and type of construction, and to account for late reports and houses started or sold before a permit has been issued. Reported data are seasonally adjusted. Monthly estimates are made for all permit-issuing places nationwide. If a survey report is not received, missing data on permits for new construction are imputed except for places that are also selected for the Survey of Construction (SOC). For these places, SOC permit data are used. We request assistance from State Data Centers to encourage jurisdictions to respond.

The US Census uses a multi-year methodology to seasonally adjust their data. Econintersect uses a simpler year-over-year analysis to seasonally adjust the data – the fear being that a major depression, government interference (incentives) in the housing markets, and other new normal effects are distorting the historical multi-year reference data.

Econintersect determines the month-over-month change by subtracting the current month’s year-over-year change from the previous month’s year-over-year change. This is the best of the bad options available to determine month-over-month trends – as the preferred methodology would be to use multi-year data (but the New Normal effects and the Great Recession distort historical data).

To say this sector is in a depression is an understatement.  Please refer to the PERMIT FRED graph above.

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