About That Surge In Building Permits

Housing-NationOfRenters-2-052015

The issue of a "renter nation" was confirmed by yesterday's building permit data which showed that permits for "single family" homes plunged last month. With permits near the lows of the "financial crisis," it begs the question as to where the surge in permits came from.

Homes-SingleFam-Permits-061715

Oh, there it is. Permits for multi-family structures of 5-units or more surged to a near record high.

Homes-MultiFam-Permits-061715

The boost to builder optimism has not been due to a surge in demand for single family homes but rather to a massive increase in the building of multi-family apartments.

It has long been hoped that the recovering economy would lead to a demand for single family homes particularly as "millennials" come of age and start to raise families of their own. Home ownership would then lead to demand for everything from furniture to lawn equipment and all the services required to maintain a housing structure in turn boosting economic growth. However, this has yet to be the case.

The problem with the massive build up of multi-unit family structures is that eventually there becomes a "glut" in the number of units available to be rented. While demand is hot, builders tend to overbuild units to excess. The eventual reversions have historically been quite nasty.

Recovery Still Very Limited

Despite the ebullient headlines yesterday, the housing recovery is still very muted especially when considering the enormous lengths the Government, Fannie Mae/Mac and Federal Reserve have gone to in order to ignite that engine of growth. As shown in the chart below, the total housing recovery is still well below historical norms.

Housing-TotalActivity-Index-052015

Furthermore, as Anthony Sanders pointed out recently, the increase in activity has come at the expense of loosening lending standards back to levels seen prior to the financial crisis.

"Fannie Mae (FNMA) and Freddie Mac (FMCC) are the primary purchasers of single-family mortgages since the housing bubble burst. The FHA is an insurer, not a loan purchaser.

Here is some empirical evidence from Fannie Mae mortgage-backed securities (MBS). Here is the average loan-to-value (LTV) ratio for Fannie Mae 4% coupon MBS."

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Streettalk Advisors, LLC expressly disclaims all liability in ...

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