Building Permits

Have you just bought land to build a house on it? That’s great, you will need financing, the workers, the plans of construction and many other things. But first of all, you will have to apply for a building permit before you can start to build. Whatever your opinion – rigmarole or safety first – you’ll have to do that...

So, put aside your construction plans and set your sights on obtaining the building permit first. This document allows for the construction of a new house. It is the approval given by the local jurisdiction to proceed with a given construction project. The building permits figure shows the finalized number of the total building permits over a given period. They are published monthly, a few weeks after the reference month. As permits and actual construction go hand in hand, these two series generally track each other closely (although there is a small delay), as the chart below shows.

_{Chart 1: Housing starts (red line, in thousands of units) and building permits (green line, in thousands of units) from January 1971 to May 2019.}

Buildings Permits and Gold

Housing is a key part of the U.S. economy, so the building permits, together with the housing starts, are closely watched by the economists and investors. This is because the housing market is seen as one of the first economic sectors to rise or fall when economic conditions strengthen or weaken. As the housing permits are issued prior to the housing starts, they are considered to be an early indicators of activity in the housing market and the broader economy. After all, a general increase (decrease) in building permits might indicate a need for more (fewer) homes. If true, the building permits should be negatively correlated with gold, which tends to struggle in good times and to shine during economic downturns.

Let’s see whether it is really the case. As one can see in the chart below, the building permits are quite volatile and not necessarily correlated with the broad economic activity. They do sometimes lead the general economic activity, although with a significant advance. For example, the building permits peaked in September 2005, more than two years before recession. On the other hand, they were increasing, not decreasing, in advance of the 2001 recession. So, don’t put all your eggs in one basket - the building permits are not the most reliable leading indicator.

_{Chart 2: Building permits (red line, left axis, in thousands of units) and the gold prices (yellow line, right axis, London P.M. Fix, in $) from January 1971 to May 2019.}

And what about the link between the building permits and gold? It might appear that there is a negative relationship. In the 1990s, the former were in an upward trend, while the latter remained in the bear market. Then, the building permits collapsed in 2006-2009, while gold enjoyed its bull market. And when gold decline accelerated in 2013, the building permits started their recovery. However, the relationship is not very tight, especially in shorter horizons. For us, the negative correlation results not necessarily from the casual link between the building permits and gold but from the fact that both series react differently to the broad macroeconomic trends. Hence, it is useful to observe the data on housing, including the building permits, but the precious metals investors should be aware of their limitations.