(Usual disclaimer: I’m just an investor expressing my own personal opinion and not a financial advisor. Consult your own financial advisor before making any investment decisions).

​

Homebuilding can be hugely profitable in good times and also a shortcut to bankruptcy in bad. Timing the building is tricky because it takes a year or more to finish. So the economy can be great when a homebuilder starts, and can fall to pieces by the time they’re ready to sell. Smart builders quickly learn to keep their eyes peeled and tap the brakes at the first sign of trouble.
 

For the last 4 months, builders haven’t liked what they’ve been seeing and have have slowed way down. That's the biggest slowdown in 7 years.
 

It's only happened 1 other time during this expansion. It was back in 2010 and unfortunately under very unusual circumstances. A short-term tax credit for homebuilding expired, so both the fall and the drop right before it were artificial.

This time, unfortunately, we don’t have the same excuse.  And ominously, the previous drop happened in 2008  and marked the start of the Great Recession.

 

If this trend continues the next couple of months, a lot of people will be getting very nervous. Housing drives a significant part of the economy. So new housing permits do a decent job of being the canary in the coal mine for a recession.

In fact, in all 9 of the last 9 recessions, homebuilders noticed something was wrong, and hit the brakes on their building. And in 8 of the 9, they slammed them really hard as the recession got close. (The exception was the 2001.com crash where the reduction from the peak was much less than usual, and “noisy”).
 

 

​

​

​

​

​

​

​

​

​

​

So does this mean we’re due for a recession tomorrow? Thankfully no.
 

First, in the past 9 most recent recessions, it took 1 to 3 years to go from the canary chirp of the peak in homebuilding to a recession. So if this does end up being the top of the cycle, we probably still have a little bit of time.

​

Second, it’s not a done deal yet. Permits could rebound next month or the next. If they do, and make new high, homebuilders (and all of us) will be breathing a sigh of relief.

​

But either way, the party won't last forever. Eventually the expansion will end, the building will stop and the end of the cycle will come. And when that happens, smart investors will be following the lead of smart homebuilders, by slowing things down and taking precautions to minimize the damage.