KEY DATA:  Starts: -0.7%; 1-Family: -3.9%; Multi-Family: +7.1%/ Permits: +4%; 1-Fmaily: +2.7%; Multi-Family: +6.6%

IN A NUTSHELL: “Despite some recent disappointing construction numbers, the rise in permit requests points to better home building days ahead.”

WHAT IT MEANS: The housing market remains strong, but we are not seeing that in the construction data.  Housing starts disappointed in October, declining for the second consecutive month.  Single-family activity accounted for the entire decline as construction of multi-family units increased solidly.  The fall-off in building activity was across most of the country with only the Midwest posting a gain.  But there wasn’t only bad news in this report.  Building permit requests for both single and multi-family dwellings rose in October.   The number of permits has been running ahead of construction significantly this year and that is showing up in a sharp rise in the number of homes permitted but not started.  Since builders don’t like to shell out money for permits they might not use, it looks like the growing backlog of permits will lead to a sharp increase in construction sometime over the next few months.    

IMPLICATIONS: Builders are complaining about the availability and cost of construction supplies and that is likely the major hold up when it comes to home construction.  Yesterday we saw a large pop in the National Home Builders Index, with traffic and current sales rising sharply.  That is a sign that the market remains quite firm.  The big issue is not buyers, but the ability to meet the demand.  Whether it is materials or labor, it is hard for developers to ramp up construction activity.  When that bottleneck will break, though, is unclear, but with the supply of existing homes largely nonexistent, builders have a chance to fill in the gaps and I am sure they would love to do that.  Indeed, once all the goods that are in floating warehouses start being distributed more efficiently, look for growth to accelerate.  The supply chain issues are creating a demand bubble that could support solid, but not necessarily robust economic growth for an extended period.  That is the silver lining in the bottleneck/high inflation dark cloud.