Our recap of the week in numbers housing for sale and rent, financing, and construction to the many indices and measures of the economy.
At first glance, housing would appear to be just the type of market that is susceptible to systematic mispricings. Most market participants have little experience, making transactions only infrequently. Asymmetric or incomplete information between buyers and sellers about demand and prices is acute. Even with the advent of new technologies, the matching of buyers with sellers remains cumbersome and slow. And unlike other markets, there are no good ways to “short” the housing market if prices get too high.
John Krainer & Chishen Wei, FRBSF Economic Letter, 2004-27, October 1, 2004
Before the Internet (yes, there was such a time), the reservoir and flow of information was shallow and slow. Information was gathered by traditional research with “feet on the ground” or through telephone surveys. Reports had to be printed and mailed to information consumers.
The internet revolutionized the gathering and distribution of information. The reservoir is much wider and deeper. The flow is faster and more voluminous. Are consumers better off? Did the world speed by the point of balance between too little and too much information?
A Peek Around the Corner
- The Federal Reserve Bank Open Market Committee released the minutes of its November meeting. To no one’s surprise and the relief of many, the Committee members gently but almost unanimously signaled that the Federal Funds Rate must continue to rise, albeit at a slower pace and possibly with a pause in early 2023. Unless you have an hour or more to spare, a summary of the minutes will be useful:
- Inflation remains persistent as wages continue to grow strongly.
- The FOMC interest rate increases may be having their intended effect, but the effects lag the rate hikes.
- Unless new data show a resurgence of inflation, future interest rate increases can be smaller in magnitude (i.e., 0.5%).
- The terminal rate likely must be higher than the Committee anticipate earlier in 2022, although no specific target was disclosed.
- A recession in 2023 is increasingly likely.
- A week later, Chairman Jerome Powell spoke at the Brookings Institute, nourishing the hawks with a message signaling strongly the Federal Reserve’s dissatisfaction with stubborn inflation, wage growth, and low unemployment, but throwing a bit of seed to the doves with the suggestion that the Fed will raise interest rates by only 0.5% in December.
- And then came the November jobs report from the Bureau of Labor Statistics.
- U.S. employers added 263,000 non-farm jobs in November, and the unemployment rate held steady at 3.7% with 6.0 million people looking to fill over 10.0 million job openings. A Wall Street Journal survey found economists forecasting only 200,000 new non-farm jobs, proving Ray Bradbury’s quip (paraphrased) that trying to predict the future is about as useful as trying to prevent it.
- The gains were strongest in services, such as hospitality (which is still recovering from the pandemic) and healthcare, but construction firms also added jobs, despite the housing downturn.
Home Sales, Starts, and Financing
- The U.S. Census Bureau’s monthly report on new home sales (deposit given or contract signed) surprised market observers.
- Annually adjusted sales for October rose to 632,000 from 588,000 in September but down from 671,000 in October 2021.
- The median sales price was $493,000.
- The October month-end estimated inventory of 471,000 new homes constitutes an inventory of just less than 9 months, also a decline from September.
- Remember that a house is considered for sale by the Census Bureau when a permit has been issued or work has begun on the foundation.
- As we have reported, the number of issued permits has dropped recently, which will push down the inventory number.
- The number of completed homes for sale has almost doubled from the record low of 32,000 from late 2021 to early 2022 but still is slightly below the historic norm.
- The count of homes under construction has reached an unusually high level, and the inventory of permits issued without a start is at a record.
- New home sales net of cancelations are down by 50% from the summer 2020 high.
- The Federal Housing Finance Agency released its 2022 Q3 House Price Index. Nationwide, house prices rose 12.21% in the year ending September 30, 2022, but prices rose only 0.1% from 2022 Q2 to 2022 Q3. (Remember that mortgage rates were under 6% for most of July and August.)
- Home prices rose the most in Florida (22.7%), South Carolina (18.4%), Tennessee (17.9%), North Carolina (17.4%), and Georgia (16.7%).
- The District of Columbia was the lowest performer at 1.8%.
- The HPI increase sets the FNMA and FMAC conforming loan limit for 2023. The 2022 limit of $647,000 will rise to $726,000 for 2023.
- In high-cost locations, the limit will be almost $1,090,000.
- Lots more data in the detailed report.
- S&P CoreLogic also released home price data this week, reporting a somewhat smaller 10.6% increase in home prices in the month of September.
- Compared to August, home prices declined by a bit less than 1.0%.
- The mildly downward trend in home prices has persisted since July despite a historically low inventory of homes, reported at 3.3 months supply, by the National Association of Realtors.
- The Mortgage Bankers Association reported a small increase in mortgage applications in the week before Thanksgiving.
- Applications rose 2.2% from the prior week, which was up 2.8% from the second week of November.
- Compared to the prior year, however, applications were down over 40%.
- The National Association of Realtors released its Pending Homes Sales Index for October. (Pending sales are measured by contracts signed, not canceled, and not yet closed.)
- The measure of pending sales nationwide dropped by 4.6% from September to October and by 37% from October 2021 to the same month in 2022.
- The index also dropped in the South, Northeast, and West, while rising month-to-month in the Midwest. All regions experienced a year-over-year decline.
- The Freddie Mac Primary Mortgage Market Survey revealed a small decline in 30-year and 15-year fixed mortgage rates to 6.49% and 5.76% respectively from 6.58% and 5.90%.
Residential Rents and Construction
- We shared last week data from the National Association of Home Builders index of builder confidence, showing a sharp decline in single-family builder sentiment.
- A deeper dive into the data revealed a sharp and surprising decline in multi-family builder sentiment, despite the current record-high number of units under construction.
- Rising interest rates and a perceived decline in occupancy drove multi-family builder confidence to 43 down from 77 a year ago.
- The NAHB predicts that financing difficulties and fear of lower occupancy demand will drive down multi-family starts in 2023 at a time when the housing supply nationwide already is below a balanced level.
- When consumer confidence recovers (probably as interest rates drop), watch for deja vu all over again with home price and rent escalation.
- Construction costs for single-family homes made an abrupt turn upward in October, rising at a near record pace after dropping from July through September.
- Data from several sources show that residential rents continue to rise year-over-year but at a quickly decelerating rate.
- One year ago, the range of annual increases was spread from 13% to 18%.
- In October and November 2022, the annual increases in rent have dropped to between 6% and 10%. The slope of the decline is steep.
- ApartmentList.com reports that median rent declined month-to-month from October to November by 1%.
- The decline was the third in a row month-to-month.
- Year-over-year in November median rent increased 4.7%, far less than the 17+% in November 2021 and much closer to the annual, pre-pandemic rates of 3.5% and 2.4% in 2018 and 2019, respectively.
- Concurrently, vacancy rates are rising nationwide from the October 2021 low of 4.1% to 5.7% in November 2022.
- CoreLogic tracks single-family rent growth. As with multi-family properties, single-family rents are declining substantially and rapidly from record highs earlier in 2022. CoreLogic data lags about 2 months, so the most recent data is from September 2022.
- The year-over-year increase from September 2021 was 10.2%, falling from April’s 13.9%.
- Rents in Florida continue to outpace the rest of the nation with Miami leading the way at 20%.
- Despite the overall slowdown in single-family rent growth nationally, several large markets experienced a higher rate of growth in 2022 than in 2021, including Orlando, Boston, New York, Los Angeles, and Chicago.
- If new household formation continues to slow (as it has with the unofficial end of the Covid-19 pandemic) and multi-family supply continues to grow as it will because of the very high number of units in construction, rents are likely to flatten and even decline until new inventory production slows to match demand.
Other News and Data
- The University of Michigan measure of consumer sentiment fell to 56.8 in November from 58.8 last month and 67.4 a year ago.
- Among other things, the U of M survey asks consumers to assess the news they have heard about business and the economy. The obvious implication is that headlines guide consumer assessment of the economy. So, does the survey measure consumers or the media?
- Where are employees hardest to find? Where are jobs most plentiful for those seeking work?
- The Bureau of Labor Statistics has your answer in an illustrative chart.
- The Bureau of Economic Analysis released an upwardly revised U.S. GDP calculation for 2022 Q3. The revised measure at 2.9% is 30 basis points higher than the original 2.6% report.
- Moving into the holiday season and coldest months, lumber finished the week down 4.3% on Thursday to close at $411 per thousand board feet. Lumber is down over 55% since the first of December 2021.