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.
There have been three great inventions since the beginning of time: fire, the wheel, and central banking.
Will Rogers
Mr. Rogers may have been exercising his flair for sarcasm, but the impact of the Federal Reserve on all Americans (indeed, all humans) is unquestionable.
This week’s mortgage originations data leaves no doubt.
Home Sales and Starts
- Wells Fargo Bank and JP Morgan Chase began the news week with a predictable warning about revenue from purchase mortgage originations.
- WFB reported originations down 37% quarter-over-quarter for the 2022 third quarter and 59% year-over-year. Refinancings fell off a cliff, dropping to 16% of the Bank’s originations, compared to 55% in the third quarter of 2021.
- At JP Morgan, the results were similar, if not worse. Originations declined 45% compared to the second quarter and were down 71% year-over-year.
- Economists surveyed by the Wall Street Journal expect home prices to decline 2.2% in 2023, which would be the first decline since 2011. See below for more prognosticating by economists responding to the survey.
- Buyer downpayment data from Redfin reveals another trend in mortgage financing that bodes poorly for affordability and a recovery of home sales.
- The median downpayment in July 2022 was $62,500, up from $32,917 in July 2019 and down a bit from the record-high in May and June of $66,000.
- Home buyers also are putting up larger downpayment as a percentage of home sales price. The average downpayment in July was 15.2% of the purchase price, up from 10% before March 2020. The record high is 18%, which occurred in May 2022.
- Redfin surmises that the higher downpayments over the past two years were a function of competition among buyers and the financially stronger buyers’ efforts to win bidding wars.
- Nashville led the nation with a 39.7% increase year-over-year in downpayment amount, reaching $64,250. Charlotte was up 32.6% to $48,200.
- As a percentage of home price, the Denver metro saw the largest increase year-over-year to 20% from 15%. In Nashville, the average downpayment rose to 15% from 12.1%, and in Charlotte, the rise was to 13% from 10.1%.
- The U.S. Census Bureau housing permits and starts data for September 2022 showed a steep decline in single-family permits and starts. All the data reported below are based on seasonally adjusted, annual numbers.
- New permits were down 17.3% from from the prior year and 3.1% from August.
- Starts were down 18.5% from September 2021 and 4.7% from August.
- Combined with the rapidly deteriorating homebuilder sentiment, the near-term future of single-family home sales is bleak.
- The rapidly rising cost of single-family, on-site constructed homes appears to be driving strong growth in the manufactured and modular housing sectors, we discovered, from an analysis of U.S. Census Bureau data.
- Looking at August 2022, the latest month for which data are available, shipment of manufactured homes rose 13.3% (seasonally adjusted) from 105,000 to 119,000 units and 25.3% from August 2020.
- The latest price data is from May 2022 and reveals that manufactured homes prices have been closely following prices for other housing options. The average double-wide price in May 2022 was $159,200 up from $128,300 the prior year (+24%), $109,100 in May 2020 (+45.9%), and $98,100 in May 2019 (+62.3%).
- The Freddie Mac mortgage rate survey reported the 30-year rate to be 6.94%. Mortgage News Daily, which surveys rates every day, had the 30-year at 7.22% on October 20.
- The housing and mortgage news is testing our memories. Mortgage applications fell to the lowest level since 1997, according to the Mortgage Bankers Association, dropping 4% over the past week. The volume of applications was 38% lower than the same week one year ago.
- The September 2022 existing homes sales report from the National Association of Realtors revealed a small (-1.5%) drop month-to-month from August and 23.8% from the prior year. Other data in the report suggest more dramatic changes are afoot in the housing market.
- Existing homes sales have dropped for 8 months straight, matching an 8-month slide in 2007. More memory tests, but the housing market is so much different in 2022.
- The median selling price for existing homes sold in September declined to $384,800 in September from $389,500 in August. A drop of less than $5,000 does little to aid affordability, especially since the mortgage rate increase over the past week more than offset in terms of monthly payment the decline in median price.
- Single-family housing inventory dropped to 1.25 million, which the NAR reports to be a 3.2-month supply. Our experience is that builders perceive the market to be appealing but not “hot” when supply is between 5 and 6 months.
- Days-on-market for homes sold in September rose to 19 from 16 in August, still far below the long-term average over over 30 days.
- First-time buyers were slightly more than 29% of the September purchases, about the same as August, while all-cash buyers reached 22%.
- For a useful but somewhat gloomy explanation of real and nominal home prices, visit Calculated Risk. The bottom line is that housing prices do not decline readily in nominal terms in weak markets absent the kind of foreclosure flood that occurred in 2008 to 2012 but do decline more readily in real terms in times of high inflation and weak income growth.
- Once you understand the difference between nominal and real data, you appreciate this bit of sour news from the U.S. Bureau of Labor Statistics: Despite wage increases at a nominal rate much higher than seen before the Covid-19 pandemic, real wages declined 3% from September 2021 to 2022.
Residential Rents and Construction
- Builders are reacting quickly to uncertainty in the housing market as shown by the U.S. Census Bureau housing permits and starts data for September 2022.
- Multi-family starts were down 13.1% from August but up 16.5% from September 2021.
- Permits, however, rose strongly by 8.2% from August and a resounding 25.5% from the prior year.
Construction Costs and Supply Chain
- A bit of good news came from the seas through the Marine Exchange of Southern California of which none of us had heard before the pandemic. In January, 109 ships sat off the coast of California waiting to unload. Last week, the number was 4, which explains . . .
- One element of the supply chain challenge is showing strong signs of a return to normalcy. Inbound container shipments to the U.S. (especially from Asia) are dropping nearly as fast as they rose.
- One shipping industry report forecasts a 4% decline in the second-half of 2022 after a 5.5% rise in the first half.
- Another container shipping analyst reported an 11% decline year-over-year in September 2022 and a 12.4% decline from August.
- A manufacturer of HVAC equipment told the Wall Street Journal that container prices have dropped 66% over the past year from $15,000 to $5,000 per ocean-going container.
- Trucking and inter-modal carriers also are experiencing rapid volume and price drops. Volume was down 4.8% in September from the prior year and 5.4% from August.
- These declines are historically unusual given the season. Shipping volumes typically rise in late summer and early fall in anticipation of the holiday gift extravaganza in the U.S.
- The National Association of Home Builders builder confidence index dropped to 38, the lowest since August 2012, except in the early months of the Covid-19 pandemic.
- Builders also expect single-family starts to decline through the remainder of 2022 and well into 2023, which portends a reduction of housing supply and continuing affordability challenges.
- The NAHB calls for policymakers to do something about affordability. But what? I call upon physicists to devise a quantum theory of gravity. Great, but how? The two problems are similarly intractable.
- Lumber rose 7.10% for the week breaking through the $500 mark. The consolidated lumber mill industry has cut production dramatically.
- Crude oil and gasoline rose slightly for the week in the aftermath of the OPEC+ large reduction in its production target last week, but the impact on retail gasoline prices is waning and not nearly as substantial as feared by the U.S. government.
Equities and Bonds
- Treasury yields continue to rise at a steady pace, reaching 4.14% on Thursday for the 10-year. The 1-year reached 4.67% that day. What does this inversion mean for the economy?
- U.S. stocks sounded an optimistic tone during the week. Be glad our national abbreviation is U.S. and not U.K.
Other News and Data
- The Wall Street Journal surveyed U.S. economists last week, asking the respondents to share their assessment of the likelihood of a recession occurring before September 2023. You do not need your favorite Vegas odds-maker to help you guess the outcome of the survey.
- The pessimists overtook optimists since the last survey in July with 63% expecting a recession up from 49% two months before.
- The GDP contraction will begin in 2023 Q1 and continue the following quarter albeit at very modest rates of 0.1% and 0.2%, respectively.
- A majority of the responding economists think the Federal Reserve will raise interest rates too high.
- The economists who expect a recession believe on average that the duration of the recession will be 8 months, about 2.2 months shorter than the average post-WWII recession.
- Freddie Mac announced humbly that it “will increase homeownership opportunities by including a review of a borrower’s bank account data to identify a history of positive monthly cash flow activity as part of its technology’s loan purchase eligibility assessments.”
- Borrowers long have submitted bank statements as part of the mortgage application process. What has Freddie Mac been doing with that information if not reviewing it? Isn’t borrower monthly positive cash flow a fundamental criterion for qualification to borrow?
- Perhaps Freddie Mac previously did not use its underwriting technology to assess cash flow but instead reviewed borrower banking information without the aid of technology?
- The Federal Reserve released its monthly manufacturing and industrial output data for September 2022.
- Manufacturing output rose 0.4% in September 2022 and 5.3% for the year.
- Construction supplies output rose 1.1% in the month and 3.6% for the year.
- Capacity utilization for manufacturing was at 80.0%, above the long-term average by 1.9%.
- Initial jobless claims were down 12,000 from the prior week, according to the U.S. Department of Labor and 16,000 below economists’ forecasts. (You know how we feel about forecasts.). About 1.39 million people are already collecting unemployment, which sounds really low because it is.