Housing Starts At One Year Low in December But Permits up 17%. Why?

house and chartBuilding starts have fallen to 4.3% in December of 2010  while building permits have increased 17% during the same month. Why?

It goes without explaining why the housing starts are down which is due in main part to the lagging economy. But why are the permits up 17% if there is such a glut of homes on the market? Often, builders will submit for a building permit when they have an contract to build a home or they decide to build a home for future inventory sales, called SPEC homes. SPEC comes from varied origination’s as in the builder will “speculate” what to build and have standing inventory if a prospective buyer needs a quicker delivery. They will also SPECIFY what features to install in the home in hopes to keep pricing down while still enticing buyers with enough optional features to pique their interest in buying that home. 

With the building industry struggling and large inventories already on the market, why did permits increase by 17% one asks? For one, weather has a profound effect on slowing construction. In this video Micheal McKee of Bloomberg explains how weather will usually keep a builder from digging a hole, at the same time, the weather will not stop the builder from driving down to the county office to apply for a permit. Many times, buyers will want to purchase before the year is out in hopes that they can move into the new home during the summer months given that it takes anywhere between 4-6 months to construct a home. My opinion as to the large increase in permits is the new codes enforcement for new construction.

Builders need to construct homes adhearing to BOCA  (Building Officials & Codes Administrators) and strict local building codes. These codes detail the requirements for framing, electrical,  plumbing, etc. In 2011, Maryland adopted a new fire prevention codes while still allowing some jurisdictions to opt out. Howard County has mandated that all homes permitted after January 2011 will be required to have a fire sprinkler system installed. Anne Arundel mandated this change in 2009. Also, framing changes were adopted that mandated the way stairs were built among other things.  Applying for a permit does not require the builder to build the home, however; if they had the choice, they would rather build a home using the old codes instead of the new ones. And in this case, it would wind up costing thousands of dollars more if the new codes were to be applied. Guess who is paying for that?

Source: Bloomberg

Chris Weymouth, Director - REALTORChris Weymouth, REALTOR®
The Weymouth Group at Keller Williams Select Realtors