An across the board downturn for housing permits and starts in May

Housing permits and starts declined across the board in May.

In the past year, there has been a unique divergence between permits and starts due to construction supply shortages.  This has been reflected in the number of housing units authorized but not started increasing to a near-50-year records of 298.4 in March. In May that number increased from April by 1.5 million annualized to 287.6:

As a result, for the time being, I am paying the most attention to the three-month average of housing starts (blue in the graph below), as these reflect actual economic activity, vs. permits (gold) which are only potential activity. That three-month average declined to 1.691 annualized, a 5 month low:

(Click on image to enlarge)

For the month, single-family permits (red above, right scale) declined 61,000 annualized to 1.048 million, a 22-month low. Total permits declined 128,000 to 1.695 million annualized, an 8-month low, and starts declined for the month by 261,000 to 1.549 annualized, a 13-month low.

Finally, below is the most recent version of a graph I have run many times in the past 10 years, showing that mortgage interest rates (red, inverted *10 for scale) lead housing permits (gold) and starts (blue):

Interest rates are higher by 2% vs. one year ago. As the graph shows, the last time the comparison was this bad was 1994, resulting in a 20% decrease in permits and starts the following year. Both permits and starts have now turned negative YoY. 

The “demographic tailwind” that buoyed housing activity 5 and 10 years ago has dissipated, as the number of 25-35-year-old first-time buyers has stopped increasing. Thus I expect a 20% YoY decline in housing permits and starts to manifest over the coming 12 months. 

The conundrum is whether the 50-year high backlog in units not yet started will delay the downturn until it clears - which might take another 6 to 12 months. Since starts are the actual economic activity, until I see an unequivocal downturn there, the massive negative signal from permits, mortgage rates, and mortgage applications remains open to question.