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They Have Permits, but Construction is on Hold

About 15% of Authorized Properties Await Shovels

By Chuck Ehmann | Wednesday, April 5, 2017

 

Each month, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly release their Monthly New Residential Construction press release with data for single-family and multifamily construction permits, housing starts and housing completions. This eagerly anticipated release is closely watched by economists, developers, lenders, the media and other interested parties. There is, however, one data series in the release that is rarely mentioned and mostly ignored.

That series is New Privately-Owned Housing Units Authorized, but Not Started, at End of Period.

What is this data and is it important? Just as it sounds, this data series represents the number of housing units authorized by building permits or zoning that have not started construction, regardless of when it was authorized. Cancelled, abandoned, expired and revoked permits are excluded.

On average, almost 10% of single-family permits are authorized but not started in a given month, while almost 20% of multifamily permits (in properties with five or more units) are slow to start. Several factors can delay the start of new residential construction, be it single- or multifamily. Bad weather is an obvious cause, but delays in financing, labor and material availability, planning and zoning issues, environmental clearances and other logistical problems also can push construction starts back. While the data series does not include cancelled or abandoned permits, some projects that may be on their way to nowhere are undoubtedly in the mix.

 

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The chart above shows the ratio of multifamily permits authorized but not started to total annual multifamily permits (not seasonally adjusted) since 1990. The long-term average since 1990 is 18.9% (red line in the chart), but that is skewed upward by the recessionary periods in the early 1990s and the Great Recession. Note that the “dot-com bubble” recession of 2001 had almost no effect on this data series, as it did not affect financial markets in the way the other two recessions did. From the late 1990s forward, excluding the Great Recession, the ratio of multifamily permits not started has hovered close to 15%.

Examining the series broken out by Census region, we see that the ratio of multifamily permits not started was higher in the Northeast and South from 1990-2007, although both declined from post-1990s recession highs of between 35%-40% to the 15%-20% range just before the Great Recession. The Midwest and West regions maintained relatively stable ratios from 1990-2007, averaging 9.3% and 14.1%, respectively.

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The Great Recession caused a spike in the ratio for the South region, but especially so for the West, reaching 47.3% in March 2010. The Midwest and Northeast regions barely reacted to the recession, rising slightly to average about 16%, before sliding to an average closer to 11% since 2011. The South is the most active region for multifamily construction, and it stands to reason that with more projects in toto, more projects may be delayed for various reasons, and thus, a higher ratio.

The Northeast region saw spikes in the ratio of more than 25% in June 2015 and again in June 2016 at the outset and anniversary of New York’s 421-a tax credit program’s original expiration date. In the past several months, the authorized, not started ratios of all four regions have converged to about 15%, close to the long-term, non-recession average mentioned above.

Can any inferences be drawn from this data series? Unfortunately, the ratio of units authorized and not started to total multifamily units is more of a lagging indicator. It tells us more about what direction the economy, and thus residential construction, is coming from rather than where it is headed. As seen in the regional chart, the ratios increased after the major recessions.

Still, it is an interesting data series that is almost never reported or discussed and could be useful as an indicator of the current state of the multifamily housing market if there is a prolonged or pronounced increase or shift in the ratio over time.

  

Chuck Ehmann

Chuck Ehmann

Real Estate Economist

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