All real estate is local, but national trends continue to point toward an end to the long decline in home prices. Builders’ plans for starting construction on new homes provide the latest data point to confirm that.
Before beginning construction, builders need to obtain a permit. Every month, the Department of Commerce releases a report on the number of permits obtained nationwide, and the June data shows the fourth consecutive increase in permits for new single family homes.
New building permits rose 2.5 percent to a 624,000-unit pace last month. Economists had expected overall building permits in June to edge down to a 600,000-unit pace.
Multifamily home construction is booming, which is expected. Apartments are needed in a tough housing market, but the supply of apartments is old. Average rental units are about 40 years old, according to Census Bureau data. New construction is simply replacing obsolete inventory in many cases.
Historic data shows that about half of the permits issued lead to the sale of a new home within four months. The most recent data suggests new home sales will run at a pace of about 300,000 a year through the end of the year. This is about where they are now.
A slow sales pace in new homes will reduce the inventory of unsold homes. This is good for prices, which will stop falling as supply decreases, and could even go up. Builders are not fueling the next bubble this time, most likely because credit is limited.
There’s also some bad news in the numbers. Slow construction of new homes is good for prices, but bad for employment. Many, including Warren Buffett, think that unemployment will stay high until the construction industry starts hiring again. The data for building permits doesn’t offer any hope that unemployment will drop.
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