Why October’s surging building permits help homebuilder stocks

Market Realist

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 future production for homebuilders, 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 fall

This is the first building permits number out of Census since August. We still don’t have housing starts data. October building permits were 1,034,000, while September was 974,000.

Permits for single-family residences were 620,000, while multi-family permits were 387,000. Both were up compared to August.

Right now, there’s a boom for rental properties as institutional investors chase the high single-digit rental yields that are available. This is making life more difficult for young adults, who find themselves most vulnerable in the job market, have high student loan debt, and are competing with the likes of Blackrock (BLK) and Blackstone (BX) for starter homes.

Implications for homebuilders

Today’s report had a negligible impact on the performance of the Homebuilder ETF (XHB), which was down slightly with the market. Earnings from the homebuilders like Lennar (LEN), KB Home (KBH), PulteGroup (PHM), and Standard Pacific (SPF) showed that orders are beginning in response to higher mortgage rates.

Despite the recent increase in interest rates, the value gap between renting and purchasing is still wide. When you consider the difference between median house prices and median rents, purchasing is cheaper. Rock-bottom interest rates and low prices for starter homes are making homeownership very affordable. As the job market improves for younger adults, those who are currently renting will contemplate homeownership. The Obama Administration has been pushing banks to lend more and to use FHA loans for first-time homebuyers. FHA loans require only 3.5% down, so they’re perfect for the first-time buyer. This move from renting to purchasing will help homebuilders in the long term.

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