Do slipping building permits mean a dull spring selling season?

Market Realist

Starts, permits, sales, and prices as spring selling season begins (Part 2 of 5)

(Continued from Part 1)

Building permits are a critical predictor of future homebuilder sales

Building permits and housing starts data are released jointly by the Census Bureau and the Department of Housing and Urban Development. Analysts use the information to anticipate the future production for homebuilders, the future demand for raw materials, and labor costs. This data will even affect the forecasts for home-related retailers, like Lowe’s and Home Depot. Building permits cover the number of privately owned housing units that were issued permits in a given period.

Multi-family permits decrease while single-family permits increase

Permits for single-family residences rose to 592,000, with multi-family permits fell to 370,000. In February, single-family permits totaled 589,000 and multi-family permits totaled 402,000. Geographically, permits increased in the Northeast and Midwest, fell in the South, and were flat in the West.

Implications for homebuilders

The market seems to be focusing on upcoming homebuilder earnings and the spring selling season. Certainly 4Q homebuilder earnings were good pretty much across the board—with Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), and Toll Brothers (TOL) reporting big increases in revenues and average selling prices. Lennar and KB Home (KBH) reported first quarter earnings already, and they were generally strong.

The builders are beginning to hit constraints with skilled labor and land. Skilled labor is becoming a big issue for them and wages are increasing rapidly for electricians and plumbers. The homebuilders have enjoyed extremely wide gross margins lately, as home prices have risen while costs have been contained. Buyers are beginning to balk at prices, however, and anecdotally, it looks like the spring selling season is off to a slow start. We should get more color as earnings season unfolds. Later this week, we’ll hear from PulteGroup and D.R. Horton. NVR reported recently, but the company doesn’t do conference calls, so we weren’t able to get any detail on the spring selling season from NVR.

Continue to Part 3

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