Our recap of the week in numbers from equities to bonds to commodities and housing to the many indices and measures of the economy and the for-sale and rental housing markets.
Equities and Bonds
- US Stocks had another tough week, down around 3% by mid-day Thursday and over 8% for the month.
- As discussed a bit more below, the 10-year US Treasury bond was volatile intra-day during the week but settled near its last-week-ending close by mid-day Thursday at a yield of 3.75%.
Home Sales and Starts
- Let’s start this week’s review with a reminder from renowned Yale economist and Nobel Prize winner Robert J. Schiller:
After real home prices peaked in December 2005, they fell 36 percent by February 2012. But it took over six years to drop that much, and real prices then shot up 77 percent from February 2012 to June 2022.
From FOMO Helped Drive Up Housing Prices in the Pandemic. What Can We Expect Next?
In other words, the real estate market though measured monthly has cycles that last years with the long-term, consistent trend of rising prices.
- In an obituary for the “starter home”, the New York Times reported on the scarcity of single-family homes priced under $300,000. The newspaper found 17, 6, and 3 listed in MLS in Raleigh, Denver, and Salt Lake City, respectively. The monthly cost of a $300,000 home at today’s mortgage rate around 6.3% totals over $2,100 in mortgage payment, PMI, property taxes, and casualty insurance. One year ago when the mortgage interest rate was around 3%, the same house would cost a bit over $1,580 per month.
- In coverage that comes as no surprise to real estate developers and housing builders, the Wall Street Journal reported on the scarcity and cost of raw land for housing development. Anecdotes from the article are illustrative of the land-cost challenge:
- A substantial land owner north of Tampa received $20,000 per acre for a portion of his farm land in a sale in 2021. Developers now are offering $40,000 per acre.
- The report cites land-use restrictions and inadequate infrastructure investment as two causes for the dramatic increase in land costs near growing metros.
- Realtor.com also published a story on the declining affordability of “starter homes”. The story includes an analysis of the income required to purchase a two-bedroom home in each of 100 markets, using the median price for such homes in each market, a ratio of 30% for take-home-pay to housing expenses, and a 6.25% rate on a 30-year mortgage.
- The most affordable market is Toledo, Ohio with a median home price of $87,500 and an estimated monthly payment of $610. Other affordable and possibly more appealing markets include Greensboro and Winston-Salem, North Carolina ($149,900 and $169,000 median price and $1,046 $1,179 estimated payment, respectively), Columbia, South Carolina on par with Winston-Salem, Chattanooga, Tennessee ($199,900 and $1,394), Greenville, South Carolina ($202,000 and $1,409), and Lakeland, Florida and August, Georgia roughly on par ($230,000 and $1,604).
- Raleigh, North Carolina came in at $327,000 and $2,281, Nashville, Tennessee at $349,900 and $2,440, Charleston, South Carolina at $495,000 and $3,453.
- Topping the list is San Jose, California at $879,000 and $6,131.
- One question immediately obvious but unanswered by the Realtor.com report concerns the availability of two-bedroom homes. Few, if any, new homes are only two-bedrooms. For example, of the 3,478 homes listed in Wake County, North Carolina (in which Raleigh is located), only 245 were two-bedroom homes, and only 51 of those were detached, according to data from Triangle MLS. So, using the Realtor.com two-bedroom starter home premise, starter homes are 7% of all the homes listed in Wake County in late September 2022.
- The data for the week:
- The 30-year mortgage began the week at 6.62% after a rout the prior week for 10-year treasuries. On Tuesday, the rate pushed past 7%. By Thursday, the rate has dropped back to 6.65%. To put the increase in perspective, a mortgage at 3% on a $400,000 home (roughly the current median price nationwide) purchased with a 10% downpayment implied a payment of about $1,517 before PMI, taxes, and insurance. At the Thursday rate of 6.65%, the same payment is $2,311, an increase of 52.3%.
- The U.S. Census Bureau released its monthly New Residential Sales report for August 2022. The annualized sales rate of 685,000 was 28.8% above July and a barely noticeable 0.1% below August 2021. Sales increased most substantially in the South both from July and the prior year. The median sales price for a new home was $436,800. Homes priced under $300,000 were just 12% of all sales. The number of new homes for sale at the end of the month was 461,000, an 8.1-month supply. The count of completed homes at the end of August was nearly 50% higher than at the end of August 2021, but those completed homes were selling nearly twice as fast as the year prior.
- The S&P Case Shiller and Federal Housing Finance Administration home price indices were reported on Tuesday for July 2022. The S&P Case Shiller index showed a slowing but still significant 15.8% year-over-year increase in home prices while the FHFA index showed a 13.9% increase for the same period. S&P measured a 0.3% decline in prices from June to July 2022, and FHFA’s index declined by 0.6%. Important to understanding the meaning of these numbers is recalling that home prices in July 2021 already had risen a record 19.7% from July 2020, according to S&P. The measures in July 2022, therefore, build on already dramatic increases since the housing boom began in mid-2020 — a 33.6% increase in home prices over two years.
- Wednesday saw the National Association of Realtors release of the pending home sales index report for August. Homes under contract in August declined 2.0% from July and over 24% from August 2021. A more-than-doubling of mortgage rates in the past year has clobbered affordability, while economic uncertainty has driven buyers and sellers to diminished enthusiasm for the respective roles in home sales. NAR’s chief economist forecasts nearly flat home prices in 2023 with a 7.1% decline in combined new and existing home sales.
- Across the country, approximately 64,000 home purchase contracts fell through in August 2022, representing roughly 15% of all pending sales. Before the pandemic, the rate was typically around 12%, Redfin reported. At least six large metro areas in Florida and Texas experienced cancellation rates above 20%.
- Redfin agents also reported a substantial decline in multiple-offer bidding competition in August 2022. Approximately 44.6% of sellers received multiple offers, down from 63.5% the year earlier. The multiple offer rate in Raleigh and Charlotte declined to 35.4% and 31.4%, respectively, from 78.9% and 68.8% in August 2021.
- A tidbit from the U.S. Bureau of Labor Statistics illustrates the housing affordability challenge indirectly. In private businesses, the average wage is $27.44 before taxes. Assuming an average work week of 40 hours all weeks of the year, the annual wage totals $57,075. At the lowest tax rate of 10%, the net take-home each month is $4,280. The prevailing rule-of-thumb, which has its roots in an amendment to the Fair Housing Act, says that no more than 30% of income should be paid toward housing costs (including utilities). For the average wage-earner in private industry, that is a meager $1,284. Your weekend challenge: Find a starter home anywhere near you for which the total monthly cost would be $1,284. Good luck.
- The U.S. Bureau of Economic Analysis released its Personal Consumption Expenditures Price Index data for August 2022. The Index rose 0.3% in August but 0.6% excluding food and energy (primarily because of a decline in gasoline prices). The In the same period, disposable personal income rose 0.4%.
Residential Rents
- The Wall Street Journal echoed a week-earlier report from Realtor.com that the drastic increase in rental rates over the past two years may be coming to an end. The WSJ reported on CoStar Group data showing a 0.1% decline in the average one-bedroom apartment rent from July to August. The decline is small but notable after two years of steady month-to-month increases totaling over 20% in two years.
- A look at the rate of rent increase across several indices shows consistent decline in the pace at which rents are rising. Various measures appear to be converging to a year-over-year pace of 5%.
Construction Costs and Supply Chain
- Lumber continued its steady march downward. Loose lumber per 1,000 board-feet was at $417 mid-day Thursday. The construction commodity essential was down 12.74% for the week and 16.12% for the month.
- Taking note of the steep drop in lumber prices, the Wall Street Journal took a deep dive into the lumber supply chain. The headline lumber price was just one of the interesting details discussed in the article:
- The housing market slowdown has reduce hoarding of lumber by builder supply companies, which in turn has reduced delivery delays.
- The rate of new housing construction is down 13% from its 10-year peak in April.
- Builder confidence has declined to the 2008 level.
- Mills in Western Canada need a price of $500 per one-thousand board-feet to break even, and those mills are facing challenges from insects, fires, and conservation initiatives.
- Lumber mills in Canada and the U.S. have begun to curtail production.
- The lumber mill industry has consolidated, which makes output reduction less scatter-shot.
Other News and Data
- The U.S. Labor Department reported Thursday on initial and continuing jobless claims for the prior week. Both declined despite a slowing economy, rising interest rates, a slowdown in new housing construction, and worldwide fears of a recession. Go figure.
On Friday, we will update this post with week-ending data, including the Real Disposable Income data for August 2022.