Our recap of the week in numbers in housing, mortgages, and construction to the many indices and measures of the economy and the for-sale and rental housing markets.
Bubbles have quite a few things in common, but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.
Jeremy Grantham
Perhaps Mr. Grantham, a renowned investor, was speaking facetiously, but the differences between the housing market in 2007 and the housing market today are unmistakable.
Take a deep breath. The data firehose was on fully this week. Data poured out from the building industry, government, and financial institutions about housing, inflation, rents, and so much more. Normally, most of the data is boring or unsurprising. My how times have changed.
Home Sales, Starts, and Financing
- The 30-year mortgage rate slid 33 basis points this week from 7.37% to 7.04%, erasing all of last week’s increase.
- PulteGroup (NYSE:PHM) reported third quarter results. Deja vu, but not really.
- Contract cancellations jumped to 24% from 15% in the second quarter and more than doubled from the prior year.
- Net new contracts declined to $2.8 billion from $3.9 billion in the second quarter and $3.8 billion in the third quarter of 2021. The average new order home price for Pulte was $570,128 up from $536,616 a year earlier.
- The company wrote off $24,000,000 in lost deposits from land transactions it canceled.
- Other builder’s released similar data recently:
- NVR (NYSE:NVR) saw net new orders decline by 15% while the average price rose by just 2.6%. Cancellations rose 51.8% from a year earlier.
- Net new orders for Meritage (NYSE:MTH) plummeted 32.9% with an average price decline of 2.9%. Cancellations jumped to 990 from 382, wiping out about 30% of the company’s new orders in the third quarter.
- For M/I Homes (NYSE:MHO), new orders net of cancellations dropped 31.3% and cancellations increased 61.4%.
- But be glad you are not the leadership at MDC Holdings (NYSE:MDC), a builder based out of Denver. Net new orders crashed from 2,399 in September 2021 to 299 in September 2022, and cancellations were up 123.6% to 1,270.
- S&P Global released its Case-Shiller Index for home prices for August 2022.
- Nationwide, home prices rose 13.0% in August down from 15.6% in July — the biggest decline in the Index in its history.
- Miami, Tampa, and Charlotte were the leaders, all above 20% year-over-year but all experience a deceleration month-to-month. Of the 20 cities measured by the Index, 18 experienced month-to-month deceleration, while Charlotte and Cleaned were flat. None of the 20 cities saw price increase accelerating.
- The South and Southeast regions led the rest of the country with year-over-year increases of 23% or more.
- Because we love history, here’s a comparison of the Index from 2006 to the present.
- Nationally, the Index was at 184.61 in July 2006 — the peak of the last hot housing market.
- By February 2012, the index was down 27.4% to 134.00.
- Today, the Index stands at 303.76, which is 126.7% above the 2012 trough and 64.5% above the 2006 peak. That’s 64.5% over 16 years, which amounts to a compound annual growth rate of just 3.16%!
- Using the trough as the baseline, the CAGR is 8.53%.
- In other words, the supposedly skyrocketing housing market was bested handsomely by the stock market, which had CAGR of 7.05% from 2006 to 2022 and 10.78% from 2012 to 2022.
- The U.S. Census Bureau and U.S. Department of Housing and Urban Development released their monthly report on sales and inventory of newly constructed homes.
- New home sales in September were down 10.9% from August to an annual rate of 603,000 and down 17.1% from September 2021. Sales declined the most in the South (-19.2%) and West (-30.4%) and rose in the Midwest (10.6%) and Northeast (25.8%). The effect of the increases in the Midwest and Northeast did not offset the declines in the South and West because the former two regions have much smaller sales volume.
- The median sales price was $470,600, higher than any other month in the past year, except July ($479,800), and 13.9% higher than September 2021.
- Inventory settled to 462,000, a 9.2-month supply at the current rate of sales, the highest in the last year at 23.2% above September 2021. The effect of inflation and rising interest rates is still moving through the new home pipeline. (The report does not break down inventory by region.)
- Drilling down into the short-term trends in the data, the revelations are a bit more . . . well . . . revealing:
- Current inventory of completed homes for sale at the end of September was 56,000, almost double the level in late 2021 and early 2022, but still one-third below “normal” level and about a one-month supply at the current sales pace.
- The inventory of homes under construction is 301,000, about 10% below the 2006 record and a very high six months of supply, largely attributed to the extended construction time cause by supply chain challenges.
- The backlog of not-started, but permitted, is at a record 105,000, which is about two months of supply, nearly double the normal level.
- Our conclusion, hardly an epiphany, is that builders continue to push to complete homes in process for the obvious reason that substantial investment is tied up in homes not completed and cannot be released for loan repayment or profit until completed. At the same time, builders are delaying starts to avoid investing in home inventory that will not sell. Buyers may soon find that the improving opportunity to purchase with less pressure and competition wanes as builders start only homes under contract with a substantial deposit.
- And, last, the Census Bureau / HUD data shows that just 6% of homes sold in September were priced below $300,000, down from 80% in 2002.
- Despite the vast differences between the real estate market today and the market in 2007, which was inflated and infected by risky mortgages, watching foreclosure activity may be instructive. Auction.com released data earlier in October that shows how foreclosure volume and discounts are changing across the U.S.
- In many markets, the supposed discount from true value is increasing.
- The biggest increases in discounts are occurring in the markets that were hottest over the past few years (e.g., Phoenix, San Diego, and the Tampa area).
- On the other hand, fewer than 10% of all mortgages today are adjustable-rate. In 2008, 80% were, and 50% of all homeowners with a mortgage have 50% equity or greater.
- Home-for-sale inventory is still at a historically low level. Among all homeowners with a mortgage, almost 86% have a rate at or below 5%. These homeowners will list for sale only if they must sell or can buy a new home for cash.
- On the other hand, inventory did jump in September from the prior year, but the increase is very much a reflection of very low inventory in September 2021.
- New listings year-over-year, however, dropped 13.7% in September, even more than the August decline of 10.7%.
- Realtor.com published a list of ten cities the website found to be the least expensive for homebuyers. There’s a reason these cities are most “affordable”.
- In a profile of a Las Vegas home builder who rose, fell, and rose again between the early 2000’s and today, the Wall Street Journal reprised (paywall) almost 20 years of the new home market:
- The number of home builders across the U.S. declined by 50% between 2007 and 2012.
- Single-family housing starts fell from 1.7 million in 2005 to 445,000 in 2009.
- The industry did not start more than one million single-family homes annually again until 2021.
- The Wall Street Journal and Realtor.com released their Emerging Housing Markets Index for Fall 2022. The release provides a list of ordered by economic health and real estate market appeal.
- Zonda observed this week that the number of “quick move-ins” on the market in Austin has increased by a few orders of magnitude since March from less than 100 homes to over 1,200.
- Pending home sales, as measured by the National Association of Realtors declined 10.2% in September 2022 from the prior month. From the prior year, the drop was much more precipitous — 31.0%. Sales were down in all parts of the U.S.
Residential Rents and Construction
- Earlier in October, Apartment List reported on research into the geographic pattern of rent increases between urban and suburban communities.
- Since the inception of the pandemic, rents have risen 27.2% in suburban areas but a lower 19.8% in urban locations.
- In April 2020, the gap between urban and suburban rent growth rates was near zero.
- Another detail of the urban-suburban gap is that rents are rising fastest in the more distant suburbs of major metropolitan centers.
- Of the metros with the largest urban-suburban rent gap, three of the top five are on the West Coast and one is Atlanta, but the biggest gap . . . Cleveland.
- Six cities buck the rent gap trend, and among them are Charleston (SC), Tampa, and Las Vegas.
- The hypothesis of the report is that the gap was triggered by the remote work trend provoked by the pandemic and only partly abated today.
- Invitation Homes (NYSE:INVH) announced a search for a $1 billion joint venture partner.
- The company decided to seek private capital in the wake of a steep decline in its stock price over the last year, making new equity unattractively dilutive.
- The company’s CEO predicts that appealing buying opportunities will arise as the housing market declines.
- RealPage, a technology provider to landlords, reported the first third quarter decline in net apartment demand in the 30 years the company has collected demand data.
- The third quarter decline drove net demand for the year down by 47,143 units and pushed rents down 0.2% from August to September.
- The vacancy rate in the third quarter climbed 100 basis points to 4.4%.
- RealPage surmises that the third quarter performance was provoked by consumer uncertainty, which deterred new household formation.
Construction Costs and Supply Chain
- Gasoline prices declined slightly over the week, while diesel was essentially flat.
- Lumber prices fell over 10% in the week ending Thursday, October 27, settling below $480 per thousand board-feet.
Equities and Bonds
- Shares of homebuilders, real estate brokers, and home rental companies are down sharply from just several weeks ago.
- The Dow Jones Industrials index was up 5.7% for the week and 14.4% since October 1. The S&P 500 and NASDAQ performed similarly. Disconnected from economic reality or prescient?
Other News and Data
- An illustrative anecdote from the world of mortgage finance hit the news Monday morning. Finance of America announced the closure of its retail mortgage business. FOA was ranked 33rd in originations nationwide. The shutdown was precipitated by a 17% drop in originations in the second quarter from 2022 Q1 and a 39% drop year-over-year.
- The S&P Global Composite Index for U.S. services and manufacturing output descended in early October at rate seen only twice since 2009 (excluding the early weeks of the pandemic).
- The Conference Board Consumer Confidence Index dropped in October to 102.5 from 107.8 in September. The index rose in August and September. An index value of 100 represents consumer confidence in 1985.
- Gasoline and food prices dimmed consumer outlook the most, but consumer intention to purchase big price tag goods (houses, cars, and appliances) rose.
- Current sentiment about business and labor conditions dropped, despite very low unemployment.
- The U.S. Bureau of Economic Analysis released its report on third quarter 2022 gross domestic product. GDP rose by 2.6% annualized after two quarters of decline. The improvement was attributable largely to a smaller trade deficit resulting from rising exports.
- The BEA also published the September Personal Consumption Expenditures Price Index. The PCE was flat from August at a 6.2% year-over-year rate.
- Initial jobless claims rose 3,000 (half of economists’ forecasts) in the week ending October 22, according to the U.S. Labor Department.
- The Labor Department also reported a 5.2% increase in compensation costs for private industry workers, but inflation offset the increase to yield a 2.7% real decline in compensation to those workers.
- Total credit card debt reached $916 billion in September 2022 in the U.S., up 9% from January 2022 and 23% from April 2021.
- Natural gas prices plummeted this week, dropping about 26% in the past six trading days and erasing more than half of the price rise since the beginning of the Ukraine war of aggression by Russia.