Housing Permits Growing Fastest Since May 1984

According to the Census Bureau, there were 65,500 housing permits filed in January 2013. This is the highest number of housing permits in January since 2008. Also, housing permits grew at the rate of 41.5% in January 2013 compared to January 2012. This is the second fastest rate of month-over-month growth since March 2010. Annually, housing permits are growing at a rate of 32.9%, which is the fastest rate since May 1984. It is likely that the annual growth rate will accelerate for the next few months.

While these growth rates are impressive, the level of housing permits is still quite low historically, as can be seen in the chart below. Since 1964, the monthly average of housing permits filed is 116,000. If we exclude the period since the housing market really began to collapse (November 2007 to the present), then the monthly average of housing permits filed jumps to 122,900. So, we are still basically at half of the historical average and barely above the troughs of the last three housing recessions.

Typically, the Fed funds rate is an excellent leading indicator for housing permits. On average, changes in the Fed funds rate lead changes in housing permits by one to three years. However, since December 2008, the Fed funds rate has been virtually zero. Because interest rates can't go below zero, the Fed funds rate is no longer helpful in forecasting housing permits. But, we can use the real Fed funds rate, which is simply the Fed funds rate minus inflation. The chart below shows that the real Fed funds rate is currently an excellent leading indicator for housing permits. Oddly enough, it isn’t a very good leading indicator when we are in a non-zero Fed funds rate environment.

While the real Fed funds rate has been negative since March 2010, for the past five months the rate has been higher than it was one year ago. (Side note: the increase in real rates from one year ago is why the Fed launched two new quantitative easing programs at the end of 2012. The Fed’s hope is that it can keep real rates low to “spur” housing and the economy.) It is this change in rates that helps us forecast where housing permits are going. Based on this trend in the real rate, housing permits should stop their accelerating growth very soon. Then we will see decelerating growth in permits throughout 2013.

We use housing permits an as an early leading indicator for the following industries: appliances, custom processors, furniture, hardware, HVAC, off-road and construction machinery, petrochemical processors, plastics and rubber, pumps, valves and plumbing products, textiles, clothing and leather goods, and wood and paper. In general, housing permits are a very good leading indicator for the production of plastic product.