With the seasonal festivities upon us, our Numbers for the Week will be abbreviated until the first Friday in January 2023. Best wishes to all.
Did You Hear?
- The Federal Reserve Bank raised its Federal Funds rate by 0.5% (50 basis points) to between 4.25% and 4.5%. The move was anticipated by everyone (and by everyone, we mean the very few people who care about this stuff).
- Following the announcement, the stock market raced upward and tumbled as quickly downward.
- Investors were hoping to hear from Chairman Powell that the Fed would pause interest rate hikes.
- Instead, he explained that insufficient information is available to guide the Fed to a pause.
- The prospect of more rate hikes worries investors that the Fed’s aggressive policy will push the U.S. economy into recession.
Home Sales, Starts, and Financing
- Homes for sale in multiple listing services nationwide are skyrocketing.
- Calculated Risk watches housing data in 35 markets. The average year-over-year increase of active listings in November 2022 was 40.7%. Austin was up over 218%. Denver, Jacksonville (FL), Las Vegas, Nashville (TN), and Phoenix all were up over 100%.
- Concurrently, the number of new listings declined 19.1% for the same period.
- The MLS data also indicates a steep decline of 36.3% in closed sales year-over-year comparing November 2022 to November 2021.
- The day began on December 20 with the Census Bureau report for November on housing starts and authorizations (permits).
- Single-family starts were down 4.1% from October and 32% from November 2021. Multi-family starts were up almost 5% from October and up 24.5% from the prior year.
- With new household formation declining over the past six months watch vacancy rates in multi-family rise as these new units become available for rental over the next year.
- Expect also to see multi-family starts decline as projects that were put into the development pipeline over the last year get started. With vacancy rates already rising, multi-family builders are likely to slow the pace of beginning new projects. (See below for early evidence.)
- In November 2021, builders obtained permits for 1,111,000 single-family homes. Last month, the number dropped 29.7% to 781,000. Multi-family authorizations dropped over the same time a less dramatic 10.7%, totaling an annualized 509,000 units, but dropped 111,000 units from October.
- The speed at which market information is compiled and reported allows builders to adjust quickly to changes in demand. Stopping new development is easier than starting.
- The result mathematically is certain. Supply will rise briefly and then decline sharply and remain low until builders, investors, and lenders all are confident that demand has recovered.
- The housing cycle is becoming as predictable as a planetary orbit.
- More detail from Bill McBride.
- Single-family starts were down 4.1% from October and 32% from November 2021. Multi-family starts were up almost 5% from October and up 24.5% from the prior year.
- The monthly survey of homebuilder sentiment by the National Association of Home Builders and Wells Fargo Bank showed a 12th straight monthly decline in builder confidence for the coming six months, down 2 points to 31.
- At 50, the index indicates that builders assess the near-term business climate as neither good nor bad. Below 50 indicates negative sentiment.
- Excluding the first few months of the Covid-19 pandemic, the Index has not been at 31 since 2012.
- Substantially higher construction costs and very poor customer traffic were major factors affecting builder sentiment in the survey.
- The CoreLogic quarterly Homeowner Equity Report brought good, if unsurprising, news for the future of the housing market at a time of uncertainty amidst declining prices.
- Year-over-year through September 2022, homeowner equity climbed by 15.8%.
- Over the same time, the number of homeowners with negative equity (an oxymoron but the commonly accepted phrase for value below debt balance) declined 9.8% dropping the total of all mortgaged homes underwater to less than 2%.
- In 2009 Q4, the percentage of homeowners having negative equity was 26%.
- Negative equity rates are highest in Louisiana and Iowa at 6.8% and 5.1%, respectively.
- Nearly all of the highest negative equity states are in the northern Midwest of the country.
- Arizona, California, and Nevada are lowest followed closely by many states in the West and Mid-Atlantic.
- The average loan-to-value of all homes with a mortgage stands at 43.6% compared to 71.3% in early 2010.
- Nationwide, the average homeowner gained $34,300 in equity in the third quarter of 2022.
- Florida easily outpaced the rest of the country with an average equity increase of $77,000.
- Tennessee, North Carolina, South Carolina, Georgia, Arizona, and Montana all were distant seconds in the mid-$40K range.
- The bottom-line. Housing in 2023 will look nothing like housing in 2009-2012.
- Despite the increase in the Federal Funds rate, mortgage rates declined a fraction to 6.31% for a 30-year fixed-rate loan, according to Fannie Mae. Last year at this time, the 30-year rate was 3.12%. The payment difference monthly is $613 on a $400,000 house with a 20% downpayment.
- For the median household of four people with an income of $94,738, according to the U.S. Census Bureau, an additional $613 per month amounts to 7.75% of gross income. (The link to the Census Bureau is to a table that reports median income by state in 2021.)
- Another bright spot in the sky above the housing market is the compressing spread between the 10-year Treasury Bond and the 30-year mortgage rate. As recently as October, the spread was over 300 basis points. On December 19, the spread had shrunk to 268 basis points. While still historically very high, the compression portends a return to a more familiar and “normal” mortgage environment.
- Lennar (LEN:NYSE) announced the offering of 5,000 homes to institutional investors.
- Fortune Magazine speculates that Lennar and its competitors are driven by a high contract cancellation rate of 26% (according to a survey by John Burns Real Estate Consulting) and a record high number of single-family and multi-family homes under construction of 1,722,000 units according to recent Census Bureau data.
- Although many of the large institutional investors slowed or stopped home purchases in 2022 Q4, their opportunity may evaporate soon. The recent decline in mortgage rates, the expected end of Federal Reserve rate hikes, and the substantial incentives offered by builders may entice some families to consider again shopping for a home.
- An analysis by The Urban Institute of home price data collected by Realtor.com concludes that only 20% of houses on the market are affordable today to households with a median income.
- On its face, the conclusion seems alarming. The evidence for genuine concern, however, can be seen in a simple metric. In September 2022, a household with median income can afford to purchase 20% of the homes on the market. In July 2015, the ratio was 50%.
- Other data explain why home prices have risen so dramatically over the past several years.
- Active listings of homes for sale have dropped over 66% from July 2015 to October 2022 from 2,500,000 to 830,000, obviously constraining supply during a time that new household formation rose.
- Over the same time, houses priced below $350,000 fell to 40% of the total listings from 70%.
- In those seven years, the supply of homes priced under $200,000 collapsed from over 1,000,000 to less than 200,000.
- The UI report goes on to suggest policy changes at the federal and local level to address home supply and prices. Respectfully, the suggestions only nibble at the fringe of the problem.
- Land prices, material costs, and labor costs will not decline materially even in the short-term and will resume their steady climb once the current “downturn” is over.
- Municipalities and utilities will not lower their re-zoning, permit, and connection fees, which can easily reach 5% of the builder’s cost of a home.
- Real estate brokers will not reduce their commissions.
- Zoning changes will not occur in enough jurisdictions or with enough breadth to make a material difference. Local residents (especially in suburban and exurban areas) will continue to oppose zoning changes (e.g., higher density or manufactured home permissibility) that lead to growth in population, traffic, and other urban effects.
- Downpayment assistance and other subsidies may help a small number of households, but the impact of those program declines as the number of houses declines in the lower price range (especially under $300,000). The subsidies simply do not raise lower-income household financial capacity high enough to purchase homes above $300,000 or even less.
- Targeting home ownership affordability in cities with lower demand will have minimal impact, except for households already in those cities. Few lower income families have the choice to relocate to an “affordable” city (e.g., Detroit or Philadelphia). Other factors dominate the locate decision (family, job, moving costs).
- Builders generally will not surrender profit margin to serve an altruistic purpose. Most builders cannot afford such largesse, and even large builders are compelled by public markets, lenders, and executive compensation schemes to emphasize profit.
- Many builders will resist constructing homes affordable to lower income buyers. The work to build a $200,000 home (even if one could be economically feasible) is not must less than the work to build a $400,000. If profit margins are the same (or more likely higher for the more expensive home), builders have no incentive to increase supply of lower cost homes. Lower income buyers also have more difficulty qualifying for financing or tolerating even the slightest increase in cost of ownership from rising interest rates or HOA dues.
- Home purchase mortgage applications declined 25.2% in November from the same month in 2021 but rose very slightly from October 2022, according to the Mortgage Bankers Association.
Residential Rents and Construction
- The Zillow Observed Rent Index for November 2022 reported a record (over the 7 years of the Index) month-to-month decline of 0.4% in asking rents.
- Despite the decline, asking rents are 8.4% above November 2021.
- Asking rents fell most in Raleigh (-1.3%), Austin (-1.2%), Seattle and San Jose (both -1.1%), and New York City (-1.0%).
- Rents are still rising in smaller markets that were not afire in 2020 and 2021, such as Louisville, Memphis, and Buffalo.
- The Bureau of Labor Statistics Producer Price Index report for November 2022 revealed a 0.9% decline in construction input costs from October but still a year-over-year rise of 11.9%.
- With construction costs up that much from the prior year, builders have little, if any, room to discount home prices and still break even, much less earn a profit.
Other News and Data
- On the same day that the Federal Reserve announced its 0.5% rate hike, the U.S. Bureau of Labor Statistics reported on wholesale prices in November. The news likely did not help the Fed believe that inflation is under control.
- In November, the Producer Price Index (the wholesale version of the Consumer Price Index) rose 7.4%.
- The big number was the construction cost component, which rose by 19%.
- When time allows, we dig more deeply into the key data that impact Federal Reserve monetary policy and the housing industry. Our digging sometimes uncovers interesting, but buried, bits of information.
- The November 2022 Bureau of Labor Statistics report on consumer prices headlined a 7.1% increase in prices in the year from November 2021 to November 2022.
- Near the bottom of the report, one sentence caught our watchful eye: “The shelter index increased 7.1 percent over the last year, accounting for nearly half of the total increase in all items less food and energy.”
- In other words, when the rising cost of housing is excluded from the CPI calculation along with exclusion of food and energy (which are very volatile), the result is a year-over-year increase in prices around 4%. While 4% is still twice the Federal Reserve inflation target of 2%, the elimination of shelter, food, and energy from the calculation reveals an economy with far less price pressure than the headline CPI number suggests.
- Even with food and energy included in the CPI calculation, excluding shelter brings the November rate to 5.2%, down from 5.9% in October.
- As home prices and rents decline in the coming months, look for the descent of the shelter contribution to CPI and a consistent decline in inflation pressure aided also by falling oil prices.
- The Federal Reserve Bank of Philadelphia published a report questioning the accuracy of estimates by the Bureau of Labor Statistics for job growth.
- The BLS has estimated that the U.S. added 1,121,500 jobs from March to June 2022.
- The Philadelphia branch of the Federal Reserve estimates the number of new jobs was 10,500.
- How can economist forecasts for future employment be accurate if the federal government can disagree by such an enormous margin on the historical data?
- New claims for unemployment benefits fell an unexpected 20,000 to 211,000, an unwelcome indication that employers are not yet fearful of a 2023 recession and that wages will at least hold steady and resist the Federal Reserve’s attempts to increase unemployment as part of the battle against inflation.
- Real hourly earnings continue to erode as a result of inflation, according to the Bureau of Labor Statistics.
- For the year ending November 2022, real hourly wages declined 1.9%, despite a rise in the dollar amount of wages.
- Worsening the income outlook for hourly workers was a decline in the average number of hours worked.