MortgageReal Estate

Yet another sign from the housing market of a looming recession

Single-family housing authorizations show persistent declines

A number of market analysts have pointed to signs of weakness in the U.S. housing market as an indicator of a possible economic recession ahead.

A slowdown in the housing market – evident by dampening home price growth, a decrease in new and existing home sales, and a downturn in housing starts – can be a key signal of the wavering health of the overall economy.

Now, the housing market has revealed yet another sign of a potential economic instability: a persistent decline in single-family housing authorizations.

What some call a key predictor of economic recessions, single-family authorizations represent building permits requesting permission to commence construction. By contrast, housing starts signal that construction has already begun. 

According to a report released Tuesday by BuildFax, a provider of data on property conditions, single-family authorizations have declined year over year for the third consecutive month in January, falling 3.48%.

The trailing three-month outlook from November 2018 to January 2019 also showed repeated declines with a 3.04% decrease, the report revealed.

“This is particularly notable as continued year-over-year declines in single-family housing authorizations are historically correlated with economic recessions between 1961 and 2018,” BuildFax stated.

Housing maintenance and remodeling activity also trended downward in the last three months.

Maintenance volume fell 6.47% year over year and maintenance spending declined 7.29%. Remodeling volume decreased 10.85% year over year, while often volatile remodeling spending increased slightly by 1.26%.

“Slowing activity in the housing sector may be symptomatic of global economic tensions and dramatic moves in the stock market,” BuildFax noted.

Nevada, Oregon and Florida were the states that posted the greatest declines in maintenance activity, which BuildFax called “a signal of shifts in consumer confidence.”

BuildFax CEO Jonathan Kanarek said it’s not surprising that the weakened housing activity seen in late 2018 persisted into the new year.

“Given current economic conditions, including the recent government shutdown, sensitivity to interest rate increases and global market stressors, like ongoing trade negotiations, we were not surprised to see persistent declines,” Kanarek said. “It is yet to be seen if an easing of these external factors will alleviate the housing slowdown.”

But one category has been posting consistent gains.

Demolition activity has risen in the past five years by 16.65% across the country.

BuildFax reported that California, Texas, Tennessee and Florida have seen the greatest amount of demolition activity in recent years, reflecting investments in those areas.

Kanarek said that while an uptick in demolition activity does signal opportunities for investment, it also comes with the potential for abandoned construction.

“Demolition activity can be a leading indicator of economic reinvestment in a community, which often precedes larger real estate projects. However, historical BuildFax research suggests intended projects are cut short when timing aligns with an economic slowdown,” Kanarek said. “During the last housing crisis, abandoned construction projects replaced anticipated new housing construction. This is not necessarily indicative of trends in a future economic slowdown, but definitely a cycle we’re tracking closely.”

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