Monday, October 11, 2021

Improving Conditions? (Q1 2010)

U.S. Housing Starts and Building Permits Increase in August

New housing starts grew to 981k in August (vs. 946k in July) after a 6.5% drop in July (IRA). Permits grew to 1.059m vs. 943k in July after a 10.2% drop in July (IRA). Although permits lagged starts, a solid increase suggests builders have regained their confidence in the recovery.

Housing Starts in Historical Context

It is still early to tell if August’s jump in homebuilding permits will translate into a rebound in housing starts. While new permits usually rise to levels higher than new starts, this pattern is typically temporary. The above chart, which goes back to 1967, shows that the largest increase in new permits in the history of this series occurred in May 1968. (Higher levels of permits may be good news for homebuilders as construction will ramp up to meet rising demand, but the same caveat applies to housing starts.)

Even though new permits have been consistently higher than new starts since early 2012, there have been small movements between the two measures over the past three years:

New Housing Starts

New Housing Starts are generally expected to slow once the rate of homebuilding from 2017 slows to a more sustainable level.

Housing Starts in Historical Context

IRA’s HHI inflation index should be plugged into the following formula: HHI = 0.02 or, after the correction, “fixed bond rate + 0.02” * (imputed dividend yield, perhaps 5%) / (HHI)

With a fixed bond rate of 5%, the result is a 10-year treasury bond yielding 5.22%.

So “HHI” should equal “total age series:” (Fixed bond rate + (HHI)*0.02)/.10 = “senior series – 1,730.9 + 1,073.6”

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