- US building permits rose to their highest level in five years…
- …after having been hit earlier by tapering worries…
- …suggesting housing will remain an important driver of US economic growth
Building permits shrugging off higher mortgage rates
US building permits rose to their highest level in five years in October. Permits stood 13.9% higher than a year ago and were up 6.2% mom, after a rise of 5.2% in September.
Residential construction currently makes up a mere 3.2% of US GDP. Nevertheless, its contribution to total GDP growth has been significant since 2010. During the last four quarters US GDP growth has averaged around 1.5%. Residential construction has accounted for almost a third of that, not considering purchases of durables families normally do when they build a new home.
When Ben Bernanke first mentioned ‘tapering’ the bond market responded strongly pushing yields up sharply over a short period. Mortgage rates are directly linked to bond yields, so they also went up. Mortgage applications are extremely sensitive to mortgage rates, so applications nosedived as bond yields rose. Given the importance of residential construction to the growth of the economy as a whole, the risks were clear. This risk of a big negative effect on construction may have been an important consideration for the Fed when they decided not to start tapering in September. Since then, bond yields have fallen back somewhat and mortgage applications have picked up a little.
Although the relationship between mortgage applications and construction activity and home prices is not extremely high, building permits, housing starts and house prices weakened over the summer, giving rise to fears that rising bond yields were undermining an important driver of economic growth. Housing starts, for example dropped some 12% between March and August and building permits dropped 8% between April en August. Building permits were up 23% yoy in Q1, 24% in Q2, but this slowed to 10.4% in Q3. New data for September and October was encouraging. It would appear that permits have strengthened again as bond yields eased back a little and then moved sideways. Permits were up 5.2% mom in September and 6.2% mom in October. The yoy rate accelerated to 13.9%.
House prices are showing a similar trend. While prices continued to rise, the pace of price increases eased over the summer and seems to have picked up again a little more recently.
What is the conclusion to be drawn?
It is dangerous to draw strong conclusions from two months’ data, in particular if the economic variable is as volatile as building permits. Nevertheless, one can draw three tentative conclusions. First, housing activity will be affected by borrowing costs. Second, the fact that building permits are regaining momentum, while bond yields have, granted, stabilised, but are still significantly higher than they were earlier in the year, suggests that it was the pace of the rise in borrowing costs that was the problem, not so much the absolute level. Finally, with permits regaining momentum, housing can continue to be an important driver of US growth.