2023 February 03

The Headline of the Week

We’ve never had a period where home prices have declined and there has not been a recession.

From Robert Dietz, chief economist of the National Association of Home Builders.

Home Sales, Starts, and Financing

• Altos Research tracks all homes listed for sale through the network of multiple listing services.
  • For the week ending January 23, Altos measured a small increase in the median asking price of single-family homes.
  • The median price of new listings during the week also rose.
  • The inventory of single-family homes was level last week and is 36% below the same week in 2020.
    • The combination of still-rising asking prices and low inventory dispels the concern that a collapse of the housing market is in our future.
• Metro-to-metro migration is growing strongly as an apparent consequence of housing affordability, reports Redfin.
  • In 2022 Q4, almost 25% of all home searches on Redfin’s website were made by residents of one metro for homes in another metro.
    • One year ago the number was 22.1%, and just 18% before February 2020.
    • Five of the top-ten destinations are in Florida.
    • The remainder are Sacramento (#1), Las Vegas (#2), Phoenix (#5), Dallas (#6), and Houston (#9).
• With the month of January already history, we have had a bit of time to look at home sales data for the last quarter of 2022.
  • Consistent with the daily reports of a real estate market doldrum, the largest builders experienced significant declines in net sales with an average drop of more than 40% from the last quarter of 2021, reports Calculated Risk.
  • The builder that suffered the least — Lennar — was the builder that was most aggressive and speedy in offering incentives to buyers earlier in 2022.
  • The number of sales before deduction of cancellations also was down substantially — by 27.5%.
  • While the gross sales number may rise in 2023 Q1 because of lower interest rates, softening of prices, and a still strong employment picture, we should expect (but we are not predicting) that cancellations will turn downward dramatically.
• D.R. Horton’s most recent earnings report provided some current data on home prices and regional trends.
  • Year-over-year, the company’s net order price was down 4.1% nationwide but 10% in the Southwest and essentially flat in the Northeast.
  • The average net order price in the last quarter of 2022 was $367,000, down $33,000 from the highest average enjoyed by the company in recent years.
  • Net sales volume clearly showed the effect of interest rates.
    • Net sales were down 38% in number and 40% in total value.
• Mortgage rates had a ride that would have induced queasiness even among the most hardy riders of roller coasters.
  • After the Federal Reserve Bank announcement of a 0.25% hike in interest rates, the 30-year mortgage rate dropped to 5.99% for the first time in months.
  • Then, the jobs report pushed the rate up steeply to 6.19% to end the week.
  • Still, the 6.19% week-ending rate was a full point below the high reached last year of 7.37% in mid-October.

Construction Costs and Supply Chain

• Lumber prices are rising rapidly. Mill owners have had an epiphany. Fewer mills means higher profits and less vulnerability to housing market uncertainty. Lumber was up 13% during the prior week and is up over 38% for the year.
  • Lumber suppliers are responding cautiously. Price quotes have short lives. Suppliers are reluctant to lock prices for more than a week.
• Buried in the January employment data from the U.S. Bureau of Labor Statistics, we find strong employment growth in construction, despite the sharp decline in new home construction.
  • The construction industry added 25,000 jobs in January primarily in specialty trades, beating the 2022 monthly average of 22,000.
  • More below on job growth, unemployment, and wages.
• Builders continue to report supply chain challenges despite improvements during 2022, according to the National Association of Home Builders.
  • The improvement in materials availability has not been matched by growth in labor supply. The NAHB estimates from U.S. Department of Labor data that 388,000 construction jobs remained open at the end of 2022. The Home Builders Institute has warned of labor challenges.

Residential Leasing

• The National Multifamily Housing Council released its quarterly Survey of Apartment Market Conditions. In summary, the multi-family market (5+ units) is softening.
  • Rents are higher than one year ago, but all of that increase is a result of spiking rents in the first half of 2022.
  • The survey polls over 230 senior executives in the multi-family industry. The survey data is translated into indices, one of which (the “Market Tightness Index”) measures the respondents’ report of change in tenant demand since the prior survey three months earlier. A value of 0 indicates that all respondents saw tenant demand drop, and a value of 100 indicates that all saw tenant demand rise.
  • The 2023 Q4 Market Tightness Index measured 14 only 2 points higher than April 2020 just after the Covid pandemic burst onto the world scene. In July 2021, the Index was at 96.

• In one paragraph, the National Association of Home Builders summarizes 2022 to 2024 in the multifamily sector.

On the multifamily front, construction boomed in 2022, up an estimated 15% from the previous year to 545,000 apartment starts. Because of slowing rent growth, rising unemployment, tighter financing and a decades-high level of inventory in the pipelines, supply constraints that have caused a large backlog of projects, NAHB is projecting that multifamily starts will fall 28% this year to a 391,000 total and will stabilize in 2024 at about 374,000 starts. There are currently more than 940,000 apartments under construction, the highest total since 1973.

Another forecast that will be incorrect in absolute numbers but likely correct in general direction. For most players in the multifamily market, the anticipated substantial decline in multifamily construction is the salient point. A dramatic decline in starts will allow any overbuilt markets to absorb inventory and will increase tenant competition in temporarily balanced or underbuilt markets. Given the time required to plan, acquire, develop, and build a project, the years that matters are 2025 and beyond.

• The rental housing vacancy rate, as measured by the U.S. Census Bureau rose slightly in Q4 2022 from 5.6% to 5.8%.
  • No region of the country saw a statistically significant change, but the Midwest and South both saw 0.4 percentage point increases.
• Apartmentlist.com released its National Rent Report covering the multi-family market in January.
  • Bottom line -- the market is cooling but from the high heat of 2021 to mid-2022, and the cooling has eased from the record-breaking declines in the Fall of 2022.
  • The pace of rent increases year-to-year slowed to 3.3%, approaching the pre-pandemic rate and the slowest in almost two years.
  • One way to examine the rent trend is to compare rent movement over the past 6 and 12 months.
    • Over the past 12 months, the top ten metros saw rent growth of 5% or more.
    • Over the past 6 months, the best performing metro experienced a rent decline of 1%.
  • The vacancy rate nationwide rose slightly to 6.1% and will continue to rise as the 900,000+ units now under construction hit the market. Ebullience among investors in 2020 for the multi-family opportunity will become available apartments in 2023, and the excitement is likely to diminish as the abundance of inventory pushes rents and absorption rate lower at least temporarily.
• More data on multi-family and single-family rents from Realtor.com and Core-Logic.
• Take all the data above, sort, filter, and do some simple math.
  • Tenants are seeing relief from rent increases and competition for apartments. For some visual proof, visit Calculated Risk. Wages continue to rise while rents fall.
  • Landlords still enjoy the benefit of astronomical rent increases from 2020 to 2022 and most of those increases will persist.
  • Rising inventory from record-breaking multi-family construction and slowing household formation will diminish demand until inflation and interest rates fall.
  • Declining multi-family starts will help absorption of new inventory but lead to diminished supply once the new inventory is occupied.
  • We are not forecasting. We're just doing the math and applying basic supply-and-demand principles.
• If you have not heard of or anticipated demand for Pickleball, your prospective tenants may be disappointed, especially in warm weather and retirement communities.

Other News and Data

• 517,000 new jobs!
  • The U.S. Department of Labor shocked the forecasting world on Friday with the employment numbers for January 2023.
  • The Wall Street Journal survey consensus was so far below the reported number that the newspaper did not report the economists' forecasts. Before the U.S. DOL announcement, the New York Times reported a consensus estimate of 187,000. Now, that's a miss.
  • Unemployment dropped to 3.4% -- the lowest since our company's founders were small children (1969).
  • In 2022, the economy added 4.6 million jobs -- the second highest in any year since the Great Depression when the government started counting jobs.
  • Yet, wage growth moderated to 0.3% down from 0.4% in December.
  • Workers' gross pay rose also from a 0.3 hour increase in the average work week, helping to offset the impact of inflation on real wages.
  • At the beginning of the Covid pandemic, many people began using the phrase "new normal" to describe the constraints on socializing and the mandate for masks. Maybe, the "new normal" was a new economic normal or maybe employers have learned better how to manage hiring and retention? Nah. The reasonable explanation will become apparent soon enough.
• The week began with the Bureau of Labor Statistics report on Producer Prices for final demand -- a measure of inflation at the wholesale level.
  • Across all goods and services, the PPI rose 6.2% in the year from December 2021 to December 2022, down from 10.0% for the year for the same period from December 2020 to 2021.
  • Unlike the consumer index of inflation, goods inflation at the wholesale level is outpacing services inflation.
• Despite rising interest rates and an apparently slowing economy (if measured by GDP growth, at least), unemployment has remained quite low.
  • The unemployment rate is 3.5% as of the end of December, as reported by the U.S. Bureau of Labor Statistics.
  • The number of long-term unemployed (jobless for at least 27 weeks) declined by over 800,000 in 2022, and the mean duration of unemployment declined from 27.6 weeks to 19.5 weeks.
  • On the other hand, the number of unemployed less than 27 weeks has increased by 639,000.
  • The more recently unemployed (perhaps represented significantly by tech workers) are having increasing difficulty finding new work.
  • The trend may have divergent influences in 2023.
    • The Federal Reserve Bank may find this data reassuring that a year of interest rate hikes is slowing the economy gradually.
    • Landlords, however, may see a decline in higher income and consistently employed potential new tenants.
• The BLS also reported year-end data on employment growth nationwide.
  • Employment rose in 42 states with Texas and Florida leading the way.
• On the last day of 2022, total job openings reached 11 million, according to the BLS.
  • In the last month of 2022, however, hiring did not increase measurably, leaving the number of job opening per job seeker at a level the Federal Reserve will not admire.
• With inflation above 6% throughout 2022, wage growth is a factor with dominant influence over the rent-paying capacity of all tenants. (Hours worked is another factor we addressed briefly last week.)
  • The Wall Street Journal dove into wage data for 2022 to breakdown the pace of wage growth among different racial, educational, and age groups.
• Regarding wages, the BLS released its monthly report on non-government compensation.
  • After a 4.0% rise in 2021, costs rose even more in 2022 by 5.1%.

• On the other hand, inflation slowed significantly at the end of 2022.
  • The Commerce Department's Personal Consumption Expenditures Index (the favored measure of inflation for the Federal Reserve Bank) rose 5% year-over-year but just 4.4% when erratic food and energy prices are excluded.
  • The PCE repeated November's meager 0.1% rise, although core PCE (against excluding food and energy) rose 0.2% from November to December.
  • At the same time, consumers cut their spending by 0.3% after adjusting for inflation.

For Something Barely Related to Housing or Economics . . . .

Because sometimes the most experienced and financially successful among us are blatantly honest and funny.

A cryptocurrency is not a currency, not a commodity, and not a security.  Instead, it's a gambling contract with a near 100 percent edge for the house.

Charlie Munger, Berkshire Hathaway's Vice Chairman