Housing Permits Signal Rising Recession Risk

Residential building permits have fallen to their lowest levels since the pandemic shutdowns, a decline Moody’s calls the most critical warning of a looming downturn.
Moody’s Analytics trained a model on decades of economic data, finding housing permits to be the single strongest recession predictor.
The model now places US recession odds at 48% within the next year, the highest reading Moody’s has logged without an actual downturn following.
Because housing decisions tie directly to consumer spending — nearly 70% of GDP — the pullback in permits could have wide-reaching consequences.

Key Takeaways

A Warning Sign From Housing

According to Globe St, Mark Zandi, chief economist at Moody’s Analytics, says the steady decline in housing permits may be flashing one of the clearest recession warnings to date. In a post on X, he called residential permits the “most critical economic variable” Moody’s tracks, adding that their slump is hard to overlook.

Builders had managed to keep demand afloat earlier this year with tactics like mortgage rate buydowns, but with inventories of unsold homes rising, they are now pulling back. “Permits have started to slump,” Zandi wrote. “They are now as low as they’ve been since the pandemic shutdowns.”

Data Backs the Concern

Moody’s conclusion comes from a machine learning model trained on decades of economic data. The system consistently flagged residential permits as the most reliable signal of recession risk. Historic trends back this up: Federal Reserve data shows deep declines in permitting typically precede recessions by seven to 26 months, though the exact timing varies.

Rising Odds of a Downturn

Zandi told Fortune that Moody’s model now pegs the chance of a US recession in the next 12 months at 48% — the highest probability it has ever registered without a downturn materializing. While he cautioned that even reliable signals don’t guarantee an outcome, he said the consistency of the pattern makes it difficult to dismiss.

Why It Matters

Residential construction plays an outsized role in the broader economy. Consumer spending drives about 69% of US GDP, and shifts in housing activity ripple quickly through related industries. Commercial permitting, by contrast, lacks the same immediate feedback loop.

Federal Reserve data shows the number of homes under construction has been declining since mid-2023, with the drop accelerating this spring — a trend now showing up in permits.

What’s Next

If history holds, the current decline in permits could be a leading indicator of weaker economic activity in the year or two ahead. While temporary sales incentives may soften the blow, builders can only reduce supply for so long before it begins feeding through to the wider economy.