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U.S. Housing Market Crossroads: Permit Declines Signal Coming Cooling

Edwin FosterSaturday, May 17, 2025 4:18 am ET

66min read

The U.S. housing market has reached a critical inflection point. While April 2025 housing starts rose by 2.7% to an annualized rate of 1.36 million units, building permits—a leading indicator—dropped 2.2% to 1.45 million, narrowing the gap between the two metrics to its tightest in four years. This divergence, compounded by regional disparities and historical volatility, suggests a slowdown is brewing. Investors must heed this warning and pivot portfolios now to avoid overexposure to housing-sensitive assets.

The Permit-Starts Divergence: A Leading Indicator in Crisis

Building permits have consistently led starts by 6-9 months, as they reflect forward-looking demand and financing commitments. The April 2025 data shows permits now falling below the 1.46 million threshold seen in August 2024, while starts remain artificially buoyed by delayed projects from earlier permit approvals. This mismatch is unsustainable.

The chart reveals a clear correlation: D.R. Horton’s (DHI) stock peaks lagged permit highs by 6-8 months, collapsing once permits turned down. Today’s permit decline portends a similar fate for homebuilders.

Historical Volatility: A Pattern of Overcorrection

The housing market’s 2024 volatility—particularly in the Northeast (±27% monthly swings) and South (±15% fluctuations)—set the stage for today’s divergence. For example:
- Northeast permits surged 42% in June 2024 but collapsed 27% the next month, reflecting speculative buying and abrupt rate hikes.
- Midwest starts rebounded 29.6% in August 2024 after a dip, yet its April 2025 19% rise now faces permit headwinds.

This rollercoaster underscores a critical truth: permits, not starts, dictate long-term trends.

Regional Disparities: South and Midwest Resilience, Northeast Vulnerability

While the South and Midwest have shown relative stability—driven by lower land costs and flexible zoning—the Northeast and West face structural crises:
- Northeast permits fell 22.6% in April 2025 due to 6.5% mortgage rates, while starts only dipped 2.5%. This mismatch signals a coming collapse.
- West starts rose 10% in April, but multi-family permit approvals (a key driver) are down 13% year-over-year, hampered by regulatory delays and cost inflation.

The South’s 1.4 million starts in April mask deeper fragility: lumber prices (WY stock) are up 15% since Q1 2025, squeezing margins for builders like KB Home (KBH).

The Math of Declining Permits: A 2025 Cooling is Inevitable

Forisk’s 2025 forecast of 1.35 million starts assumes a 5% Q4 decline. With permits now contracting, this projection may be overly optimistic. Key risks include:
1. Treasury Yield Volatility: Rising rates (the 10-year Treasury hit 4.2% in April) are deterring buyers and pushing mortgage rates to 6.6%, a 15-year high.
2. Labor Shortages: The South’s construction workforce is 8% smaller than 2020 levels, per NAHB data.
3. Multi-Family Overhang: 2023’s 800,000 multi-unit permit approvals will flood markets in 2025-2026, depressing rental yields and investor demand.

Investment Implications: Rotate Now to Avoid the Fall

The permit-starts divergence is a flashing red light for investors:
- Sell housing-sensitive assets: Homebuilders (DHI, KBH), lumber stocks (WY), and REITs tied to residential construction face 20-30% downside by year-end.
- Buy defensive sectors: Utilities (XLU), healthcare (XLV), and dividend-paying industrials (CAT, MMM) offer stability amid slowing growth.
- Short housing ETFs: Consider inverse ETFs like SRS (Short Residential REITs) or pairs trades against the iShares U.S. Home Construction (ITB).

This correlation has averaged +0.65 since 2020, meaning housing weakness will spill over into broader markets. Early rotation is critical.

Conclusion: The Clock is Ticking

The April 2025 data is a harbinger of a coming slowdown. Permits have turned down, and regional imbalances—particularly in the Northeast and West—are magnifying risks. Investors who cling to housing assets will face punishing losses as starts peak in late 2025. The time to pivot to defensive plays is now.

Act decisively. The housing boom is over—prepare for the bust.

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