SC Connecticut News

Economists have long sought to understand the intricate relationship between housing markets and the broader economy. A new study by Cameron LaPoint, an assistant professor of finance at Yale School of Management, and Gustavo Cortes from the University of Florida, delves into this connection by examining residential building permits. The research suggests that fluctuations in building permits can serve as indicators for economic booms and busts.

LaPoint highlights the significance of building permits, stating, "Building permits give you a nice signal of investors’ beliefs about the local economy." These permits represent developers' options to build in the future and reflect market sentiment. Over a century's worth of data reveals that changes in permit activity often precede shifts in stock and bond markets. "It’s a connection between Main Street and Wall Street," LaPoint adds.

The researchers compiled a comprehensive dataset covering U.S. local building permits from 1919 to 2019. This effort involved digitizing historical data using advanced techniques and sourcing information from various archives, including Dun’s Statistical Review and the U.S. Census Bureau's Building Permit Survey.

Their findings indicate that increased volatility in building permit activity correlates with subsequent market fluctuations. For instance, when permit activity in Florida rose by 10%, stock market volatility increased by 0.2 percentage points, while bond market volatility went up by 0.7 percentage points a year later.

LaPoint notes that this predictive power is more pronounced in regions with flexible housing supplies, such as Florida, compared to heavily regulated areas like Connecticut. He states, "Places like Florida have been more lax in terms of their regulatory constraints on new housing."

The study also explored how local permit activity impacts individual companies' stock prices based on their geographical exposure to volatile real estate markets. Companies operating in areas with significant swings in permit activity experienced greater stock price volatility.

The implications extend beyond financial forecasting; they may inform housing policy and address affordability issues. LaPoint emphasizes the need to balance supply with population demand: "Looking at these 100 years of data, it’s worth thinking about how do we go back to where we can meet the demand of the population."

Currently, LaPoint and Cortes are working to fill gaps in their dataset from 1957 to 1959 before making it publicly available online along with interactive graphs showcasing key data insights.

For regulators, monitoring building permit activity could provide early warnings for potential financial instability due to overbuilding risks. As LaPoint suggests, "This could help regulators identify when and where to focus attention to curb potential developer enthusiasm."