Housing Permits: Good news or a problem with the Seasonal Factors?

February housing starts and permits bounced off their January lows. The news is positive: after 8 months of large declines, we finally get a bounce. And at least some analysts are calling for the bottom on starts. (See this post from Calculated Risk.) To me, it does not mean the end, but at least it is not bad news.

At least that’s what I thought this morning. However, this evening I delved a little deeper into the data. It seems the uptick in housing permits is an illusion caused by a larger than normal change in the seasonal adjustment factor.

Take a look at the picture below. It shows the seasonally adjusted permits data as released by the Census (the black line). This data shows a slowing and maybe even an inflection point near the end of 2008. (Even if this data were true, it would not signal the bottom – just take a look at early 2008 figures to see this.) However, the inflection and the rise in February owes entirely to this year’s seasonal factors. If instead, I use last year’s factors for December, January and February, I find a line that is still moving down (the blue extension).
Here is a picture of the seasonal factors themselves between 2005 and February 2009. Take a look at their sharply lower level (this boosts permits) and their odd shape relative to previous years. I am not a seasonal adjustment expert; but, aren’t seasonal factors supposed to be stable? Shouldn’t they adjust the monthly data in a consistent manner across time? Otherwise, aren’t they simply introducing noise into the seasonal series?

So, now I am at a loss on how to interpret the permits data. I was really thinking that the 10 percent rise in single-family permits might (just might) mean something. It was just one month but it was still better than nothing. Now, it seems we should not be too excited about the uptick.

Changes in the seasonal factors do not foretell good times ahead.

By the way, I am not sure I understand why the seasonal factors are so unstable. Is it because the downturn is throwing off the estimation procedure? If somebody has a good explanation of these factors, please post a comment or email me at secreteconomist@gmail.com.