Housing Permits Return to Growth in June

According to the Census Bureau, there were 91,400 housing permits filed in June 2014. This was an increase of 8.9% compared to one year ago. Housing permits returned to growth in June after contracting last month for the first time since July 2011. Also, this was the second fastest month of growth in 2014. However, the three-month and annual rate of change continue to decelerate. The annual rate of change is down to 9.6%, which is its slowest rate of growth since February 2012.

The real Fed funds rate is a good leading indicator of housing permits. The year-over-year change in the real Fed funds rate has been trending down since April 2013. Because interest rates tend to lead housing permits by about 12 months, we should expect the annual rate of change in housing permits to bottom sometime in the second half of 2014. 

A continued decline in the year-over-year change in real interest rates is a positive sign for the housing market. If the nominal rate and the inflation rate stay where they were in May, then the year-over-year change in the real Fed funds rate will continue to fall through the end of the year. This likely will provide a temporary boost to housing permits. However, if the nominal rate rises (the Fed has hinted that this will happen sooner than some expect) or the rate of inflation falls back down (which doesn't seem likely based on current trends), then the year-over-year change in the real Fed funds rate will go lower for only another couple of months.

We use housing permits as an early leading indicator for the following industries: appliances; custom processors; furniture; hardware; HVAC; off-road and construction machinery; petrochemical processors; plastics; plastic/rubber products; pumps/valves/plumbing products; textiles/cloting/leather goods; and wood/paper products.