Yesterday’s report that housing permits and housing starts both reached post-recession record highs in April was the most important data of the year to date.
Quite simply, it takes the possibility of recession off the table for the rest of this year. I expect employment and income to continue to grow, and real retail sales to overcome the weakness they have exhibited since last November, and make new highs. This also suggests positive news as to wages in the coming months.
For the record, here is the graph of permits (blue) and starts (red) for the last 5 years:
As I pointed out 2 months ago when starts fell off a cliff, starts are much more volatile than permits. As permits also tend to lead starts by a month or two, they are the “go to” number of the two. I read some doomish commentary by Mish yesterday, pointing out the volatility of the numbers as an excuse to ignore them. Funny, I didn’t hear that caution two months ago when the data tanked. Hmm…
And the 3-month rolling average of permits is also at a new post-recession high.
I have been pounding the table since the “taper tantrum” of 2 years ago that interest rates drive housing (subject to demographic trends). But if you don’t believe me, how about this graph, which was published yesterday with the explanation – “Here’s the inverse of the Fed funds rate versus housing starts:”
That was published by Paul Krugman yesterday, to the point that
houses last a long time and don’t become obsolete (the same is true to some extent for business structures, but in a more limited form). So Fed policy, by moving interest rates, normally exerts its effect mainly through housing.
So, as I occasionally remind you, you’ve been reading the right blog.
And here is the close-up of the last few years showing the YoY change in housing permits (blue) vs. the inverse of mortgage rates (red):
While mortgage rates haven’t made new lows (thus refinancing remains somnolent), they haven’t retreated significantly off recent lows. I therefore expect improvement in the housing market to continue.
Now if the US dollar could back off its recent highs, the shallow recession in the industrial part of the economy should also go away.