Bank of America is telling investors to focus on building permits rather than housing starts for a clearer read on the U.S. housing market. In a note released Wednesday, the bank highlighted that September housing starts fell 5% month over month, while permits—a forward-looking indicator—held flat. That divergence, the bank argues, suggests the underlying trend in homebuilding is more stable than the headline starts number implies.
Housing starts measure the number of new residential construction projects that have actually broken ground in a given month. Permits, by contrast, are approvals granted for future construction. Because permits lead starts by a few weeks to a few months, they are often seen as a better gauge of where builders expect demand to go. When permits hold steady while starts dip, it can signal that the drop in groundbreaking is temporary—perhaps due to weather, labor shortages, or timing—rather than a sign of weakening demand.
What the data shows
The 5% decline in September starts follows a pattern seen in recent months, as elevated mortgage rates continue to weigh on affordability. The housing market has been under pressure from higher borrowing costs, which have pushed many potential buyers to the sidelines. However, the flat permits reading suggests that builders are not abandoning projects en masse. Instead, they may be delaying groundbreakings until conditions improve.
Bank of America's interpretation aligns with broader market commentary. Earlier this week, Treasury yields dipped partly in response to soft housing data, as investors read it as a sign that the economy is cooling enough to allow the Federal Reserve to ease policy. Lower yields typically translate into lower mortgage rates, which could eventually support housing demand.
Builders FirstSource under the microscope
The bank also used the housing data to update its outlook for Builders FirstSource, a major supplier of building materials to homebuilders. BofA cut its forecasts for the company and lowered its price target to $60 from $71. The revised target still implies upside from current levels, but it reflects a more cautious view on near-term demand for building products.
Builders FirstSource is a bellwether for the housing industry because its revenue is directly tied to the pace of home construction and remodeling. When starts and permits soften, demand for lumber, windows, and other materials tends to follow. The company's stock has been sensitive to housing data, and the price target cut suggests BofA expects the current sluggishness to persist for a while longer.
What it means for investors
For everyday investors, the key takeaway is that the housing market is not collapsing, but it is also not rebounding quickly. The flat permits reading offers a glimmer of stability, but the drop in starts shows that builders remain cautious. This mixed picture is likely to keep pressure on housing-related stocks, including builders, suppliers, and home improvement retailers.
Investors should also watch how the Federal Reserve responds to the cooling housing data. If the Fed begins cutting interest rates, mortgage rates could fall, potentially boosting homebuying activity and, in turn, benefiting companies like Builders FirstSource. However, any recovery is likely to be gradual, as affordability remains a challenge for many buyers.
For those with exposure to housing stocks, the BofA note serves as a reminder that the sector is still in a wait-and-see mode. The bank's decision to trim its price target on Builders FirstSource—while not abandoning the stock—reflects a cautious but not pessimistic outlook. As always, it's important to consider your own financial situation and risk tolerance before making any investment decisions.
Looking ahead, investors will be watching upcoming housing data releases, as well as any signals from the Fed about the path of interest rates. A sustained recovery in permits would be a positive sign, but until that happens, the housing market is likely to remain a source of uncertainty for the broader economy.
