Yesterday, the U.S. Department of Housing and Urban Development (HUD) released updated residential construction data for building permits, housing starts, and housing completions. Many economists look at this data and information for a variety of gauges on how the U.S. economy and Gross Domestic Product (GDP) will perform going forward. Overall, residential housing and construction made up a larger portion of GDP in 2004-2007 than it does today, but it is still a good barometer of potential job growth in construction, manufacturing, and the general economy. Today, we will give you some information on what these terms mean and their potential impact on the economy.
Building permits are “pulled” when a developer is getting ready to start construction on a residential unit. They are generally considered a leading indicator of economic activity because when the permit is issued, this means that a developer has made the decision to invest money in hopes of earning a profit later down the road on the completed property. To make that decision, the developer typically has seen something in that local or national economy that he or she believes indicates strong demand for what is going to be built. This is good because developers are typically entrepreneurial, small business owners who create jobs and economic activity for the rest of us.
The developer must have all the architectural construction drawings done and have had the project approved (commonly called entitled) by a local or county planning board or committee before he can pull permits. In some states, like California, it can take several years and hundreds of thousands or millions of dollars to get a larger project approved by the county because of NIMBYism, environmental studies that must be done, and sometimes having to get restrictive zoning changes approved. In other states, it can take shorter periods of time to get projects approved, but it always requires a significant amount of money to get a project entitled. In other words, developers who go all the way through to getting a permit must be very confident that their project will see a profit upon completion.
HUD reported authorized building permits for January were 676,000 units, which is 1.2% above the December 2011 rate, but 19.0% above one year ago when only 568,000 permits were pulled. That's good news because it indicates that there's optimism in the market again, and hopefully, the permits pulled will continue to increase as the general economic climate improves.
Typically, once a building permit is pulled, the construction begins in the following months, but that's not always the case, as there are sometimes delays and issues. Those issues could be a change of the economic outlook or profitability of the development, which is why in addition to looking at permits pulled to gauge the health of the economy, the HUD also measures housing starts.
Housing starts are calculated from the date that construction actually begins on the site. This is when the economic activity really begins, as any project probably averages $100,000 – $300,000 of invested capital spent per unit. Once the builder starts to spend/invest money, construction workers will be hired, manufacturers will be selling appliances, plumbers will be plumbing, and electricians will be wiring houses. And about half of that, as a rough estimate, is paid to local laborers.
Then, those laborers spend that money on food, clothing, electronics, housing, and other items that will hopefully fuel more economic recovery. This is the economic “stimulus” our politicians frequently talk about, except this is private stimulus instead of the government stimulus that you pay for via your income taxes.
Reported housing starts were 699,000, with 175,000 of those being multi-family units. That overall rate is only 1.5% above December, but 9.9% above a year ago. Additionally, the multi-family portion is an increase of 8.5% from the prior month, according to The Wall Street Journal . That multi-family increase is a continuing trend in the past year and if it continues to be strong, it can help alleviate any potential for rental property shortages as those units come onto the market in the next few years. Realize that any shortages might increase average monthly rents, so individuals leasing housing units will be helped out by more multi-family starts, which is better for renters like yourself.
It’s good news that it appears developers are moving forward with projects after a few really bad years of real estate related news. Let’s hope this good news in early 2012 continues for the next few years.