Our recap of the week in numbers housing for sale and rent, financing, and construction to the many indices and measures of the economy.
“The function of [housing] economic[s] forecasting is to make astrology look respectable.”
John Kenneth Galbraith
Our weekly data summary is abbreviated for the Thanksgiving holiday. We hope you enjoy family, friends, and food in balanced measures. We will not be reporting any data on consumption by anyone.
Did You Need to Be Told?
- Builder confidence in the single-family sub-market in October 2022, as measured by the National Association of Home Builders, dropped to 33, the lowest since June 2012, except at the very beginning of the Covid-19 pandemic. The index has declined for 11 months consecutively.
- Unless you have been listening to political pollsters, you are not surprised. So, let’s try to find something interesting in the NAHB data.
- When the housing bubble burst in 2006, the index hit 33 on the downward slide in August 2006 and bottomed at 8 in January 2009. The peak of the index during that bubble occurred in June 2005 at 72.
- During the most recent housing market surge, the NAHB index peaked at 90 in November 2020, held in the mid-70s to low-80s through April 2022 and succumbed to rising interest rates very rapidly from 77 in April. The complete historical data are available.
- Regionally, builder confidence in single-family varies in order from the Midwest (36) to the West (28) with the South (34) and Northeast (30) sitting between.
The Rule You Never Knew
- Before the Thanksgiving holiday, James Bullard, President of the St. Louis Federal Reserve Bank reminded investors of the rule they mostly never knew -- the Taylor Rule.
- To summarize in a fashion that will offend academic economists, John Taylor, a former Stanford economics professor devised a "rule of thumb" that the Federal Reserve Bank must maintain a Federal Funds Rate above the rate of inflation to keep inflation from rising and eventually to force inflation downward.
- Bank President Bullard, a reported interest-rate hawk, presented a chart displaying the Federal Funds Rate range he believes will be necessary to bring inflation under control.
- And the chart tells us . . .
- President Bullard's "dovish" assumption places the target Fed Rate at about 5.0%. The rate on November 17, when Bullard gave his presentation, was 3.83%.
- A more conservative, let's say "hawkish", application of the Taylor Rule would put the Federal Reserve Bank's policy rate at over 7%.
- The stock market responded with dismay, but bond investors were unmoved.
Home Sales, Starts, and Financing
- Stalemate is the prevailing notion among housing market analysts. Buyers think home prices will fall further. Sellers believe the market will turn in due time and do not want to surrender their low rate mortgages. Buyers and sellers are attempting to time the market.
- And so, we quoted this week from one of great minds in economics. Attempting to time the market is foolish. Buyers should be looking for good value and measure the long-term potential economically and mentally of finding the right home, remembering that interest rates will decline which will rapidly drive up home prices again.
- We have seen the housing market sensitivity to mortgage rates and inventory shortage. The latter will not disappear anytime soon. As interest rates decline, buyers will scurry back into the market, compete with each other, and drive up home prices very quickly. No other forecast makes sense. The only question is when the scurrying will begin.
- The stalemate notion is supported by a continuing decline in existing home sales volume while prices continue to rise albeit more slowly.
- Single-family existing home sales were down 6.4% from September and 28.2% from October 2021, according to the National Association of Realtors.
- The median existing home sales price was up 6.2% to $384,900 from the prior year.
- Despite significantly lower sales volume, inventory is not changing with almost no change from September or October 2021. Many fewer homeowners are offering their property for sale.
- If you hold or hear any skepticism about the impact of remote work on the demographics of the United States, consider the ranking of housing market popularity by Realtor.com.
- Rochester, N.Y. with a median home price of $225,000 (compared to the national median home price of more than $400,000) ranks second.
- Other top-ranked metro areas with median home prices below the national median include La Crosse, WI (4th), Columbus, OH (5th), a favorite at PPG -- Fort Wayne, IN (7th), and Topeka, KS (8th).
- Thirteen of the top 20 boast a median home price below the national median with a range from $189,000 in Akron, OH up to $399,900 in Norwich, CT.
- For a historical perspective on the housing market, we looked back to 2006 with the help of the St. Louis Federal Reserve Bank.
- In January 2006, builders started construction at an annualized rate on 1.823 million single-family houses and 423,000 multi-family (5+ units) dwellings.
- In January 2022, builders started 1.157 million single-family homes annualized and 499,000 multi-family units.
- In October 2022, the number of single-family starts dropped to 855,000, which is higher than any month from November 2007 to February 2016, and multi-family was up to 556,000, which beats every month in history except January 2020 and April 2022.
- December 2020 saw the highest number of single-family starts annualized at 1.308 million, more than 500,000 fewer units that the Housing Boom high.
- As hot as the housing was immediately before and during Covid-19's attack on humanity, the heat was not nearly as strong as in 2005 and 2006.
- The housing market is cooling today, but no data suggests that the market temperature will descend to the chilly depths of 2008.
- The substantially lower inventory today will protect sellers against fire-sale discounting.
- Substantially lower starts will protect against an extended period of excess inventory.
- When mortgage rates descend below a psychologically significant level (perhaps under 6.0%), buyers will scoop up the relatively few bargains, prices will stop dropping, and lagging inventory will re-ignite buyer enthusiasm. By the time buyers realize the market is recovering, the best bargains will be gone. Market timing is a fool's errand.
- Reassurance that 2022 is not 2007 can be found easily in housing market data. One source of comfort is forbearance volume. According to the Mortgage Bankers Association, forbearance volume rose in October by 1 basis point -- that's 1/100th of a percentage point -- from 0.69% of all mortgages to 0.7%.
- Much of housing demand over the last two years was driven by the formation of new households by Americans under 34 who left the comfort of parental housing as the Covid-19 pandemic eased. For an instructive analysis of recent household formation data, read CalculatedRisk, which doubts the veracity of recent U.S. Census Bureau data.
- Investor purchases of single-family homes dropped over 30% in the third quarter of 2022, reports the Wall Street Journal.
- The WSJ blames interest rates. We blame intelligence. Higher rates and slowing home sales drive down home prices. Investors are watching the price curve.
- Single-family rents are still rising at a historically high pace, but the pace is slowing from earlier in 2022.
- Not slowing is the pace of political grandstanding and stupidity. Our proof, the Stop Wall Street Landlords Act.
Residential Rents and Construction
- In the short week before Thanksgiving, the Bureau of Labor Statistics released its Producer Price Index data for October 2022.
- The across-the-board PPI dropped from 8.4% in September 2022 to 8.0% in the month ending October 31, 2022.
- In the construction sector, the year-over-year increase in the price of trade and construction services rose 19.6% but declined from the September pace of 23.2%.
- Before the Thanksgiving holiday, Redfin released the data from its monthly survey of rents nationwide.
- The median asking rent rose 7.8% from October 2021, a substantial softening from late 2021 and earlier in 2022.
- The median asking rent was down 0.9% from September 2022.
Other News and Data
- From the Bureau of Labor Statistics, a continuing decline in "real average hourly earnings" by 2.8% year-over-year in October 2022. The "real" indicates an adjustment for inflation.
- The average work week shortened by almost 1%, adding to the inflation-adjusted loss of earning for hourly workers.
- Homebuyers face rising home prices, higher interest rates, and lower wages.
- The Conference Board, a think-tank and business organization, published its Leading Economic Index for October. The LEI is designed to be a forward-looking indicator of the performance of the U.S. economy.
- The Index declined by 0.8% in October compared to September, which was the eighth consecutive monthly drop.
- Based on the LEI downward pattern, the Conference Board forecasts modest GDP growth of 1.8% in 2022 and a recession beginning in late 2022 and continuing through mid-2023.
- The flighty optimism of stock investors after the 7.7% October 2022 CPI report was a boon for housing stocks. The middle two weeks of November saw publicly traded brokerages and builders rise substantially on hope that the big drop in 30-year mortgage rates would portend a recovery in the housing market.
- The 30-year mortgage rate ended the week almost unmoved at 6.65%.
- Lumber also was essentially flat, ending at $431.
- The IPO dream turns nightmarish.