The housing sector continues to revive, according to this morning’s update on housing starts and newly issued residential building permits. Residential construction increased 3.6% in October over the previous month, the Census Bureau advises. Last month’s permits total total slipped 2.7%, but that’s not a worry at this point because this metric, which offers a clue about future construction activity, is still advancing at a robust pace generally.

Improvement is also the message in the latest read on existing home sales, which rose 2.1% last month and are higher by nearly 11% vs. a year ago, according to the National Association of Realtors. Home builders are feeling more optimistic about their industry as well: confidence in this sector rose this month rose to its highest level in six years, the National Association of Home Builders reported yesterday. Improving conditions are also reflected in today’s update on starts and permits, even though permits backtracked a bit.

The crucial perspective on starts and permits as it relates to the business cycle analysis is watching how these indicators perform on a year-over-year basis, and on that front the trend remains convincingly positive. Both series are rising at well over 20% a year, a strong signal that the housing sector is expanding at a healthy pace. In absolute terms the rate of construction is still well below the levels reached before the housing bust circa 2006. But at this stage the most important factor is the growth rate. An expanding housing sector, even from a low base, is critical on a number of levels for the macro picture these days. The good news is that the trend continues to be our friend.

The housing market’s recovery is timely for the economy overall. Housing at times can represent nearly one-fifth of GDP, according to some estimates, and so the news that this arena is no longer a drag on growth but is a net positive again is significant. All the more so at a time when concerns are rising about the fiscal cliff and its potential for creating headwinds for the economy. A housing recovery, in other words, is no longer a sideshow for the business cycle; instead, it’s probably an essential source of growth if there’s any chance of falling into a new recession. Housing probably won’t save us if the worst-case scenario for the fiscal cliff arrives, but for now let’s just say that the rebound in residential real estate couldn’t come at a better time.
“Housing is absolutely going in the right direction,” says Harm Bandholz, chief U.S. economist at UniCredit Group. “Excess supply has been wound down and there’s a steady increase in demand. That’s good for construction.”
It’s also good for the big picture. In yesterday’s update of The Capital Spectator Economic Trend Index (CS-ETI), new building permits for October was one of the few missing pieces of data for last month’s profile. With today’s update, there’s another data point that falls into the positive column. Even before this morning’s housing news, CS-ETI was telling us that recession risk was low, based on the available data through October. The analysis is even more compelling now.
If the fiscal cliff hazard could be defused, the economy might really take off. That leaves us with a crucial question, as posed by the LA Times today: “Can the bozos who created the ‘fiscal cliff’ save us from it?” The business cycle, it seems, is at the mercy of the clown factor.