The Headline of the Week
Mortgage debt as a percentage of U.S. GDP has dropped from an all-time high of about 63% in 2009 to below 50% today. Americans have not binged on mortgage debt over the past 14 years and foreclosures will not pose the systemic problem they did in 2009 to 2012.From Calculated Risk.
Home Sales, Starts, and Financing
- KB Home announced last week that its contract cancellation rate in 2022 Q4 was 68%. (That’s not a typographical error.)
- KB’s cancellation rate was slightly more than half as high in Q3 at 35%.
- In Q4 2021, the rate was 13%.
- The current mortgage rate environment began in early September 2021 when mortgage rates rose for the first time in over two years. From that crossing of the line, mortgage rates rose 3.85 percentage points in just over a year (but have fallen from the October 2022 peak by more than one full percentage point).
- The last time mortgage rates rose year-over-year by 3.85 percentage points was in June 1981.
- By July 1982, mortgage rates were falling year-to-year.
- Usually, simplicity facilitates communication. The National Association of Home Builders apparently understands the value of simplicity, at least when communicating messages apparently intended for policymakers.
- The Association apparently analyzed an unspecified pool of potential homebuyer data to gauge the impact of rising interest rates on the financial capacity of those homebuyers to purchase a home.
- The NAHB concluded that the rise in the 30-year mortgage interest rate pushed 18,000,000 households into the realm of unaffordability.
- Of course, the decline in mortgage rates to a historically low and unsustainable level around 3.0% that occurred during the pandemic pushed those households into the realm of affordability.
- Which movement was in the wrong direction?
- If you believe that the U.S. has a housing shortage the December 2022 data for permits, starts, and completions is dismal, at best.
- New permits issuance was down 1.6% from November and 29.9% from December 2021.
- Single-family authorizations were down 6.5% from November.
- Multi-family authorizations rose over 7%.
- Rising interest rates have not yet suppressed multi-family planned construction to the degree that single-family has been affected (but see the starts number below).
- For 2022, 1,649,400 new housing units were permitted, down from 1,737,000 in 2021.
- Housing starts also declined in December by 1.4% from November and 21.8% from December 2021.
- Single-family starts rose in December from November by over 11%, indicating that builders are working through a backlog and recovering from supply chain problems.
- In the multi-family segment, starts dropped 18.9% from December and 16.3% from the prior December, suggesting that investors and lenders paused to watch economic data.
- Looking next at completions, the data also are mixed.
- Single-family and multi-family builders completed fewer units in December, compared to November.
- Year-over-year, the single-family segment was down less than 1.0% for completions, but multi-family was up a whopping 25.8%.
- Finally a look at housing units under construction affirms the notion that builders are working through a backlog.
- Over 1,700,000 units were in construction in December 2022, up over 12% from December 2021.
- Single-family construction contributed very little to the year-over-year rise, while multi-family was up 24.8%.
- New permits issuance was down 1.6% from November and 29.9% from December 2021.
- The 30-year fixed mortgage rate ended the week up 0.08%, ending at 6.15%, despite a slight decline over the week in the 10-year U.S. Treasury Note.
- A combination of the holiday season conclusion and lower interest rates drove the volume of mortgage loan applications up 27.9% for the week ending January 13, according to the Mortgage Bankers Association.
- Refinance applications contributed a slightly larger percentage to the MBA Composite Index.
- Year-over-year, the volume still was down substantially.
- Existing home sales declined in December for the eleventh month consecutively, according to the National Association of Realtors.
- The median sales price rose 2.3% from December 2021, but the December 2022 median price was down 11.3% from June 2022.
- Even with the price adjustment from June, the current median price is above the slope of the annual median price increase from 2012 to 2020.
- The Covid-19 housing bubble may be bursting, but the exhaust so far still leaves homes priced higher than historically would be expected over the long-term.
- Total sales in 2022 were down 17.8% from 2021.
- Since 2002, existing home sales have hit the December 4.02 million level only twice — in 2010 after the Great Recession and at the beginning of the Covid-19 pandemic.
- All cash transactions declined by more than 20% but gained in share of total sales as many large institutional buyers took a continued breather that began in October 2022.
- The median sales price rose 2.3% from December 2021, but the December 2022 median price was down 11.3% from June 2022.
- The U.S. Bureau of Labor Statistics breakdown of the 2022 Consumer Price Index revealed that cost of shelter rose 7.5% for the year.
- Fifteen of the total of thirty-two categories rose more than shelter.
- Only three categories declined — communication (-1.1%), gasoline (-1.5%), and used vehicles (-8.8%).
Construction Costs and Supply Chain
- Copper closed the week up slightly but has risen over 11% since the beginning of the year.
- Lumber skyrocketed during the week by 25% during the week and are up over 14% since January 1.
- Suppliers report a looming shortage as the construction industry emerges from winter into the stronger spring season.
- Producers idled mills and drove down inventory in 2022 when lumber prices fell over 60%.
- If mill owners continue to believe that the current production capacity is right-sized, prices could rise significantly.
- An October 2022 survey of builders by the National Association of Home Builders recorded a modest improvement in the availability of building materials and “modest” probably is too sanguine.
- The comparison is made to a May 2021 survey at the height of the Covid-19 pandemic impact on imports from China and the capacity of sea shipping.
- Despite the improvement, builders continue to report widespread shortages of appliances and windows followed by HVAC equipment, copper wiring, plumbing fittings, and cabinets.
- Over half of the responding builders reported a shortage in 17 categories of materials.
Residential Leasing
- Looking at the housing starts, under-construction, and completion data reported above, the multi-family market is anticipating a surge in supply in 2023.
- The historically high under-construction number must be read as an indicator that 2023 completions will increase inventory.
- The declining starts number suggests that the impact on vacancy rates will be short-lived.
- At the end of 2022, RealPage counted 971,500 multi-family units under construction.
- The distribution of those units is not even across the country. Five cities accounted for a total of 220,826 units (22.7%) under construction — Dallas, Phoenix, New York City, Austin, and Atlanta.
- Five cities led growth in multi-family permits in 2022 with one overlap to the cities above — Atlanta, Tampa, Indianapolis, Houston, and Richmond.
- The five cities with the largest drops in permits were Nashville, Cincinnati, Anaheim, Fort Lauderdale, and Charlotte.
- Another collection of data from RealPage assist analysis of near-term opportunity in multi-family markets.
- Markets with the largest addition to current supply are likely to see the most significant vacancy rise and slowest rent growth as the new supply comes online.
- RealPage listed fifteen metros with the highest percentage of inventory growth: Colorado Springs (11.9%), Huntsville (AL), Sioux Falls, Lakeland, Boise, Austin, Salt Lake City, Charlotte (8.7%), Port St. Lucie, Raleigh / Durham (8.3%), Nashville (8.2%), Sarasota, Phoenix, Palm Bay, and Jacksonville (FL) (6.3%).
- As the new inventory becomes rentable, watch the loss-to-lease numbers change to gain-to-lease.
Other News and Data
- The U.S. Census Bureau reported another monthly decline in retail spending by consumers with a 1.1% decline from November in which sales also declined significantly.
- The data are not adjusted for price changes (i.e., inflation), which was above 6% in December.
- Year-to-year, sales rose 6.0% in December and 9.2% for the year 2022 compared to 2021.
- Prices at the wholesale level also showed signs of a slowing economy as illustrated in the U.S. Bureau of Labor Statistics data release last week.
- The Producer Price Index declined 0.5% in December after rising 0.2% and 0.4% in November and October, respectively.
- The PPI rose 6.2% in 2022 after a 10.0% spike in 2021.
- Meanwhile, the employment picture in the U.S. remains rosy for workers.
- New jobless claims fell to 190,000 last week from 205,000 the prior week, according to the weekly U.S. Department of Labor report.
- The four-week moving average for new claims and continuing claims both declined.
- Inflation data may show an easing of price increases, but consumers are still responding strongly to higher prices, according to a report from Morning Consult (paywall).
- Households earning above $100,000 annually reported the steepest decline in spending — over a 10% reduction in December from November.
- More than 20% of the surveyed households reported expenses exceeding income for the month, which may not be surprising given the gift-giving holidays, but the percentage is higher than in December 2021.
- Since April 2021, nearly two years, real average wages have been in decline, according to data from the U.S. Bureau of Labor Statistics.
- At the same time, the average work-week has shortened.
- The result from December 2021 to December 2022 was a 3.1% drop in average weekly earnings.
For Something Barely Related to Housing or Economics . . . .
We’ve written hear about cycles — housing bubbles and corrections, inflation and recession, interest rates, and much more. We recognize these events as cycles because we see the changes occur up and down, usually more than once in our lifetime. Not all cycles are so easily seen.
From now through the middle of February, a 50,000-year cycle will enter the lives of everyone on Earth. Comet C/2022 E3 (ZTF) (seen below) was discovered less than one year ago in the distant sky much too far away to be seen without an exceptionally sensitive telescope. For the next month, the comet will be visible with the naked eye in a dark night sky. Be sure to watch. We promise that you’ll never see it again.
