Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of the economy and financial markets in real-time. The insights provided here are slivers of our research process that are integrated algorithmically into our systems to create rules-based portfolios.
Our primary takeaways are as follows:
- The recent trend in housing data showed signs of a sequential improvement, with building permits, starts, and completions increasing.
- However, upon zooming out, we continue to observe pressures persist in our estimates for residential investment which remain in contraction.
- Additionally, our cyclical measures of residential investment such as permit slowdown and pending construction projects are also within the ballpark of a recession.
- In the context of markets, homebuilders’ equity prices have increased sequentially, in line with the current relief in the residential investment trend. However, pressures persist and we continue to remain in a Slowing but Growing economy.
The latest data for August showed housing permits increased by 4.91%, housing starts increased by 9.62%, and housing completions increased by 9.22%. Below, we show the current levels for the same:
Zooming into the data, housing permits increased by 4.91%, surprising consensus expectations of -1.05%. Below, we show the sequential evolution of the data, along with the smoothed one-quarter change in the most recent data. We provide the smoothed version as monthly housing data contains significant noise.
For further context, we zoom out to show the contributions from single-family homes (-5), two-family homes (-7), and multi-family homes (-91) to the fall (-103) in total permits over the last year:
Consistent with the permits data, housing starts data showed starts increased by 9.62%, surprising consensus expectations of -1.13%. Below, we show the sequential evolution of the data, along with the smoothed one-quarter change in the most recent data. We provide the smoothed version as monthly housing data contain significant noise.
To illustrate the bigger picture, we show the contributions from single-family homes (135), two-family homes (-7), and multi-family homes (-22) to the rise (51) in total starts over the last year:
Last, in our sequential analysis, we turn to housing completions data, which showed completions increase by 9.22%. Below, we show the sequential evolution of the data, along with the smoothed one-quarter change in the most recent data. We provide the smoothed version as monthly housing data contain significant noise.
We show the contributions from single-family homes (-61), two-family homes (8), and multi-family homes (327) to the rise (415) in total completions over the last year:
To get a better sense of where we are in the housing cycle, we examine how many construction projects have been approved but not yet started. According to the latest data, 19% of projects are yet to begin construction. Looking through history, housing-led recessions usually begin when this measure of construction slack is around 15% suggesting that we are within the ballpark of a recession.
Now, while this rise in unstarted projects can often be a sign of weakness in perceived end demand, it can also be due to existing backlogs in construction. Below, we show a measure of these backlogs, which show the number of homes under construction relative to those under construction:
We conclude by examining another measure of housing weakness, i.e., permit slowdowns- which measures how much building permits have fallen from their cycle highs. Large drops in permits bode ill for the broader residential investment complex & GDP. The latest data shows that building permits are off their cycle highs by -22.98%. Typically, housing-led recessions usually begin when this measure of cyclical weakness is around -29% suggesting that we are within the ballpark of a recession.
For a timelier ready-on condition, we turn to mortgage applications and mortgage spreads. The latest data shows a sequential improvement in our weekly tracking of mortgage applications. Our latest estimate suggests downward pressure on mortgage borrowing and residential investment. Our latest estimates show mortgage applications down by -34.14% compared to one year prior. We present this information below:
To assess the borrowing conditions driving these changes in mortgage applications, we turn to mortgage spreads. According to our measures, mortgage spreads remain contained. Spreads have remained contained since June 2024. Since then, the 30-year mortgage yield relative to 10-year Treasury yields has remained flat. Below, we present the 30-Year Mortgages relative to 10 & 30-Year Treasuries:
Aggregating these pressures, our latest monthly estimate place real residential investment at 1% versus one year ago.
Residential investment provides significant insight into the state of the business cycle, which allows us to better understand the drivers of current equity market pricing. Today, equity market returns are consistent with residential investment trends over the last year. We show this below:
Overall, the recent trend in housing data showed signs of a sequential improvement. However, upon zooming out, we continue to observe pressures persist in our estimates for residential investment which remain in contraction. Additionally, our cyclical measures of residential investment such as permit slowdown and pending construction projects are also within the ballpark of a recession. In the context of markets, homebuilders’ equity prices have increased sequentially, in line with the current relief in the residential investment trend. However, pressures persist and we continue to remain in a Slowing but Growing economy. Until next time.