The Headline of the Week
Over 44 million households, or roughly 35 percent of the U.S. population, live in rental housing. . . . [A] patchwork of renters rights, a shortfall of affordable housing, and a longstanding challenge of rents rising faster than incomes contribute to housing insecurity that millions of American renters experience every year.The White House Blueprint for a Renters Bill of Rights
Read the White House Blueprint and ask yourself whether the principles enumerated address the foundational challenges to affordable housing in the U.S.
Home Sales, Starts, and Financing
- At the behest of Fortune Magazine (pay-wall), CoreLogic assessed the risk of a decline in home sales prices in 392 housing markets nationwide in 2023.
- CoreLogic considered income growth projections, unemployment forecasts, consumer confidence, debt-to-income ratios, affordability, mortgage rates, and inventory levels.
- The firm’s conclusion? Wait for it. Home prices likely will decline in 391 of the 392 markets with 338 markets facing a “very high – 70% or more” likelihood of a price decline. In May 2022, the number was 26.
- The backstory, however, is important. From March 2020 to June 2022, home prices resembled a Titan rocket, climbing 41%. A decline of even 10% in 2023 still would leave home prices at the November 2021 level, which was 50% above the 2006 peak (not adjusted for inflation).
- In a companion piece, Fortune collaborated with John Burns Real Estate Consulting to assess home prices at the end of 2022 in comparison to each market’s peak 2022 price.
- Black Knight gathers and monitors mortgage data across the nation. Its report for January revealed a strong rebound in mortgage activity.
- From the 1st to the 4th week of January, purchase mortgage rate locks rose 64%, bringing the activity to 13% below the pre-pandemic (2018 and 2019) level.
- In the 3rd week of January, 57% of rate locks included a rate buy-down by payment of at least 1/2 point. Of these, 44% paid a full point and 25% paid 2 points or more. In the Fall of 2022, 71% of borrowers paid points to buy down the mortgage interest rate, and 43% paid 2 points or more.
- Pre-pandemic purchase borrowers paid an average of 0.5 points, which rose in January to 1.16 points.
- From the same report, Black Knight’s Home Price Index shows a 6th straight monthly decline of approximately 0.5% and a drop of 5.3% from the June / July 2022 peak.
- January 2023 prices, however, are still 5.0% above the prior year in January.
- The 30-year average price appreciation annually is 4.6%.
- Another interesting and perhaps more enlightening data point from Black Knight is the portion of national median income required to make the 30-year mortgage payment on a house of average price purchased with 20% down.
- The ratio stands in January at 35%, down from 38.4% in October when 30-year rates spiked.
- The record low occurred in 2013-2014, and the record high was in 1981.
- The ratio hovered in the low to mid 20s during the years that the Federal Reserve held its Federal Funds Rate at or near zero.
- Despite the cacophony of concern among the media, government, the housing industry, and policymakers about the affordability of housing, the obvious solution economically and practically to increase supply remains unaddressed.
- Material costs rose during the pandemic and are not likely to return to pre-pandemic levels.
- We wrote about the construction labor shortage in last week’s post.
- Zoning and its NIMBY precursor constrain the density and size of homes and lots.
- Another challenge brought to light once a quarter is the undersupply of lots ready or in the pipeline for home construction, as measured by Zonda.
- The Zonda New Home Lot Supply Index is a proprietary assessment by Zonda of the current state of lot supply in each market vis-a-vis the demand for lots in each market. A value of 100 indicates that the market is in perfect equilibrium. Values over 100 indicate oversupply. Conversely, values under 100 indicate a current and future supply shortage.
- Zonda also tracks lots in development by stage of development.
- The 2022 Q4 assessment is bleak for anyone hoping to see the supply of housing increase.
- Zonda estimates:
- Approximately 1,000,000 lots in some stage of development from mobilization of equipment through street installation in process.
- Developers will complete 36,057 lots in 2023 Q1.
- Another 163,452 will be ready for home construction in Q2.
- The second half of 2023 will see another 464,997 completed.
- Assuming none of this development slows or stops because of market conditions, 664,506 lots will come online in 2023, and less than 350,000 will be in backlog.
- In December 2022 when home sales had declined substantially in the wake of the steep climb of mortgage rates, the annualized number of new homes sold was 616,000, and the Census Bureau estimates that 644,000 new homes were sold in 2022.
- From 2007 to 2008, new home sales dropped below 600,000 for the first time since 1991, according to the Census Bureau data as depicted by the St. Louis Federal Reserve.
- In 2017, the number climbed above 600,000 for the first time in 10 years.
- The meager number of new homes sold in those 10 years contributed substantially to the backlog of home buyers who drove sales volume up from 437,000 in 2014 to 822,000 in 2020.
- Yet, the 2020 sales peak was below the sales volume from 1998 to mid-2007, and neither period of high volume alleviated the proclaimed shortage of housing in the U.S.
- With only 1,000,000 lots in process and fewer than 665,000 scheduled to be developed in 2023, at best, the supply and demand imbalance likely will be a long-term feature of the housing market.
- The Fannie Mae Home Purchase Sentiment Index for January showed a very small improvement but from a very low level.
- Despite the upward green arrow in sentiment, only 17% of the survey's respondents expressed the view that January was a good time to buy a home.
- Sellers are far less pessimistic with 59% believe that January was a good time to sell.
- Following the strong quarterly performance of D.R. Horton, as we described last week, PulteGroup reported strong quarterly earnings in its fourth quarter.
- The profit performance was driven primarily by a 17% increase in average sales price to $571,000.
- In tandem with $882 million of profit, Pulte reported a 41% drop in new orders from the fourth quarter of 2021.
- The company's cancellation rate rose to 32%.
- Multiple data points from the Realtor.com weekly report suggest that the for-sale housing market decline is reaching a trough.
- New home sales and pending sales rose slightly in December.
- The median listing price for newly listed homes was up year-over-year in early February by 7.7%.
- Inventory growth slowed slightly in January, but inventory in most markets remains below pre-Covid levels.
- ApartmentLIst.com surveyed 6,000 employed Americans in December 2022 regarding their relocation history and intention.
- Of employees required to work full-time at a workplace, 17% relocated in 2022.
- By comparison, 27% of fully remote workers moved.
- Hybrid workers moved the most at 31%.
- Among all relocators, the most important factor for relocating was more living space with 25% citing this factor.
- Among remote workers, two other important factors were access to natural and urban amenities.
Construction Costs and Supply Chain
- Despite a much less exuberant housing market, construction commodity prices and material availability have not cooled commensurately.
- Lumber declined slightly during the week but remains above pre-pandemic prices and well above the $300 average that prevailed until early 2017.
- At the beginning of the pandemic, filling the tank of a dozer or loader set back a site contractor $2.91 per gallon a dropped as low as $2.39 in May 2020.
- The price peaked in June 2022 at $5.75 primarily due to a Russian megalomaniac.
- At the end of January, the price had dropped to $4.57.
- Given the volume of diesel consumed in development the 57% increase since February 2020 has a substantial impact on the cost of new housing.
- Cement and concrete prices have risen 25% since early 2020 and continues to rise month-to-month. Those prices have not declined measurably since 2012.
- Concrete block began 2022 at $1.66 and now sells for an average of $2.16 and as much as $2.45 in the southeast U.S.
- Gypsum building materials have risen almost 51% since September 2020.
- Since June 2020, asphalt roofing materials have risen 37.7% and declined only once briefly for one month.
- Metal stud prices have risen in the past year from $9.00 per stud to over $12.00.
- R-19 fiberglass insulation rolls are up a meager 11.8% since January 2022.
- All of the above pricing data from the U.S. Bureau of Labor Statistics Producer Price Index data and Levelset.
- Construction employment also posted a strong performance in 2022, according to Bureau of Labor Statistics data.
- The construction unemployment rate ended 2022 at 4.4%.
- The industry employed 242,000 more people in December 2022 than in December 2021.
- Tennessee and Florida were two of the five states with the lowest construction unemployment rate.
Residential Leasing
- Trepp, a provider of CMBS and commercial mortgage information, analytics, and technology, released last week a list of five apartment markets most likely to experience financial struggles, based on occupancies, debt service coverage ratio, and net cash flow. The five markets cited by Trepp are St. Louis, San Francisco, Seattle, Chicago, and Minneapolis.
- After riding the crest of the multi-family construction boom in 2022, RangeWater Real Estate will slow the pace of new unit development in 2023, likely anticipating the impact of over 900,000 in-production units across the nation.
- In 2021 and 2022, RangeWater started 2,482 and 2,774 units respectively.
- In 2023, the company will reduce starts to 1,327.
- From data gathered for and presented at the National Multifamily Housing Council, John Burns Real Estate Consulting estimates the inventory of multi-family rental units will increase by 14% in Austin, Charlotte, and Nashville by the end of 2024. That's a lot.
- Camden Property Trust, a publicly traded multi-family housing REIT with over 59,000 units owned or managed, reported results for 2022 Q4. Some of the REIT's commentary is informative.
- Despite over $1 billion in liquidity, Camden may make no acquisitions in 2023, but will start between $250 million and $600 million in new construction projects, targeting delivery in 2025 and after.
- The REIT raised its IRR target to 7% to accommodate higher borrowing costs.
- At the end of 2022, 96.8% of Camden's units were occupied, down 20 points from Q3.
- New lease growth dropped to 2.0% in January 2023 from 16.5% in the prior January, and renewals were down also to 7.3% from 13.5%.
- Another large apartment REIT, UDR also reported year-end financial results earlier in February. Notable comments from management included:
- A growing emphasis on technology to reduce repair and maintenance cost and unit turn time.
- An increase of 6.8% in G&A and maintenance costs.
- A diminishing opportunity to pursue capital transactions because of rising interest rates.
- A 12.7% average rent-per-unit increase.
- An occupancy rate of 98% and almost no concessions on renewals or new leases.
- In the last three months of 2022, the U.S. Department of Housing and Urban Development funded multi-family construction projects and acquisitions at the annualized rate of $15.76 billion.
- In the four quarters ending September 30, 2022, HUD funded $21.01 billion.
- In the prior year ending September 30, 2021, HUD funding totaled $29.48 billion.
- Realtor.com released its rental report for December 2022. We link to it but will not discuss it because the report address homes with 0 to 2 bedrooms, which is a size we believe to be irrelevant in the single-family markets in which we work.
- RealPage Analytics reported a small rise in multi-family permit issuances in December compared to November, but the number of permits issued and projects started in December both were down significantly form the prior year.
- Single-family permits also are down substantially year-over-year.
- Metropolitan area highlights included a 10,809 decline in permits issued in Nashville.
- Raleigh ranked 10th nationwide in multi-family permits issued at 6,710, and Tampa came in 7th at 7,055.
- Redfin released its January 2023 rent report, citing a 2.4% increase in asking rents from January 2022.
- From January 2021 to January 2022, the increase was 15.6%.
- Asking rent declined 1.9% from December and 5.4% from the August 2022 peak.
- From January 2020 to January 2023, asking rent rose a total of 22.5%.
- Year-over-year, rent rose the most in Raleigh (22.5%) and rose 14.2% in Charlotte (NC), 9.8% in Nashville (TN)
Other News and Data
- According to SmartAsset, four of the five safest cities in the U.S. are in Texas. The other is in northern Los Angeles county in California. Of the top 15 safest cities, 11 are in Texas and California.
- When affordability is added as a factor to rank metros, the top most affordable and safe towns are Cary (NC), Olathe (KS), Naperville (IL), Overland Park (KS), and Frisco (TX).
- As a result of federal government largesse and few opportunities for spending, Americans accumulated approximately $2.7 trillion in new savings by the end of 2021.
- Measured as the rate of savings as a percentage of income, the average wage earner saved 16.8% of disposable income in 2020, up from 8.8% in 2019.
- In 2022, the savings rate dropped to 3.3%.
- By the end of 2022, 35% of those savings had entered the consumer economy likely helping to drive inflation and facilitate the pandemic recovery.
- As the balance in savings accounts dwindles watch for declines in consumer spending and increases in consumer debt, which could put additional pressure on home sales volume and prices and apartment rents.
- The University of Michigan monthly measurement of consumer sentiment showed variability in consumer sentiment in early February with some elements of the gauge rising and others falling. The sentiment number is still far below the high during the Covid recovery and pre-pandemic.
- The U.S. Census Bureau released its 2022 annual update on population and housing unit estimates. Lots of data. Not for the bleary-eyed.
For Something Barely Related to Housing or Economics . . . .
- If you are a fan of history or enjoy looking backward to plan forward, perhaps you'll be interested to see the first images ever captured of early star formation. With 13 billion years of history in the images, surely we can make an intelligent plan for the next few days or so.
