Economic & Housing Update May 19, 2023
Higher mortgage interest rates weigh on existing home supply, helping the new construction market thus far
Summary:
Mortgage rates shot up to 6.9% this week—the highest since the collapse of SVB ten weeks ago. The rise stems from a confluence of factors listed below.
Mortgage purchase applications fell 5% and Redfin’s Demand Index also ticked down 2% this week.
The Housing Market Index for new construction climbed for the fifth month to 50 in May, well above expectations. While new home sales are holding up well, new housing permits continue to show weakness.
Some weeks provide important economic data releases that completely shift our understanding of the state of the economy and what the Federal Reserve might do in response. Other weeks simply confirm our preexisting expectations. This week was neither. There weren’t any major data releases for inflation or the labor market. No Fed press conference. The only major economic data release was for retail sales, which showed a slight rebound after two months of declines. Yet, long-term bond yields and mortgage rates climbed significantly—up 30 and 40 basis points, respectively. Mortgage rates shot up to 6.9% this week—the highest since the collapse of SVB ten weeks ago. So what is behind the increase? The rise may stem from a confluence of factors including hopes about raising the debt ceiling, strong consumer spending, and a yet resilient labor market with unemployment near record lows (jobless claims fell this week). Investors have slightly higher expectations for the Federal Funds rate now (either from another rise, or more time until they cut) due to tepid progress on inflation (see chart).
Higher mortgage rates continue to weigh on housing supply with homeowners locked-in to low rates. New listings of homes for sale were down by 24% from a year ago this past week. The lack of existing home supply is helping the new home market though. A third of existing single family inventory is new as of Q1, which is near the record set a year earlier. Thus, new home sales have generally fared better this year than existing home sales. Builder confidence for the future is improving as well. The National Association of Homebuilder’s (NAHB) Housing Market Index rose by 5 points to 50 in May 2023, easily beating market consensus of 45 (see chart). This marks the fifth consecutive month of growth and the highest level since July of the previous year. Mortgage applications for new home purchases were up 4.1 percent compared to a year ago in April, according to MBA.
The Census also released data on new housing construction this week. Housing starts and permits are each hovering around 1.4 million units. While this is down more than 20% from a year earlier, it remains above the rate of new construction in 2019 before the pandemic and has stabilized since last October. Multifamily construction has been particularly strong with multifamily completions reaching the highest level since the 1980s (see chart). However, the NAHB forecasts that multifamily housing starts will continue to pull back by another 10% over the next year. Part of the reason is because tightening credit conditions are finally hitting builders. “Commentary from multifamily builders indicates that it has become more difficult to obtain loans for multifamily development as a result of tightening financial conditions,” said Chief Economist Robert Dietz. A pull back in future multifamily construction hurts future renters and first-time homebuyers when more supply is still desperately needed in many cities.
New housing data:
The NAHB/Wells Fargo Housing Market Index rose by 5 points to 50 in May 2023, easily beating market consensus of 45. This marks the fifth consecutive month of growth and the highest level since July of the previous year, due to strong demand for new construction driven by limited housing supply. However, builders are still facing challenges in meeting this demand due to shortages of building materials like transformers, as well as tightening credit conditions for residential real estate development and construction, influenced by the Federal Reserve's interest rates hikes. The gauge for current single-family home sales was up 5 points to 56, while the home sales over next six months sub-index increased 7 points to 57. In addition, the gauge for prospective buyers rose 2 points to 33.
The MBA Purchase Index decreased 4.8% to 165.40 points in the week ended May 12th 2023. Mortgage rates increased last week even as Treasury yields were essentially flat, with the spread between the two rates widening to 310 basis points. The average contract interest rate for 5/1 ARMs increased to 5.71 percent from 5.35 percent, with points increasing to 1.1 from 0.79 (including the origination fee) for 80 percent LTV loans. Mortgage applications for new home purchases increased 4.1 percent compared to a year ago in April.
Building permits declined by 1.5 percent to a seasonally adjusted annual rate of 1.416 million in April 2023, according to a preliminary estimate. This marks the second consecutive month of decline and falls short of market expectations of 1.437 million permits, suggesting housing demand remained subdued due to higher interest rates and increasing consumer prices. Permits for the volatile multi-segment tumbled 7.7 percent to a rate of 561 thousand, the lowest since last July 2021, while single-family authorizations increased 3.1 percent to a seven-month high of 855 thousand. Permits were down in the Northeast (-23.6 percent to 113 thousand) and Midwest (-15.2 percent to 173 thousand), but were up in the South (4.3 percent to 801 thousand) and West (3.8 percent to 329 thousand).
Housing starts unexpectedly increased 2.2% month-over-month to a seasonally adjusted annualized rate of 1.401 million in April of 2023. However, data for March was revised to show a bigger 4.5% slump compared to initial estimates of a 0.8% drop.
Existing Home Sales decreased 3.4% month-over-month in April of 2023, following an upwardly revised 2.6% fall in March. The median existing-home sales price slipped 1.7% from one year ago to $388,800. The inventory of unsold existing homes increased 7.2% from the previous month to 1.04 million at the end of April, or the equivalent of 2.9 months' supply at the current monthly sales pace.
The National Association of Home Builders (NAHB) redesigned its Multifamily Market Survey (MMS) in the first quarter of 2023. The Multifamily Production Index (MPI) had a reading of 50 for the first quarter while the Multifamily Occupancy Index (MOI) reading was 82. “NAHB’s current forecast has multifamily starts declining by more than 10% per year in 2023 and 2024,” said NAHB Chief Economist Robert Dietz. “Commentary from multifamily builders indicates that it has become more difficult to obtain loans for multifamily development as a result of tightening financial conditions due to actions of the Federal Reserve, which reduce future apartment construction.”
New economic data (source):
Retail sales increased 0.4% mom in April of 2023, rebounding from two consecutive months of declines, but well below market forecasts of a 0.8% increase. Sales at motor vehicles and part dealers were up 0.4% and other increases were seen in sales at building material & garden supplies dealers (0.5%). On the other hand, sales at gasoline stations unexpectedly declined 0.8%, despite a rise in the price of gasoline and sales at food and beverage stores went down 0.2%. However, the so-called core retail sales which exclude automobiles, gasoline, building materials and food services, increased at a faster 0.7%, in a sign of sustained consumer demand.
The number of Americans filing for unemployment benefits fell to 242 thousand in the week ending May 13th, down from an 18-month high of 264 thousand and below market expectations of 254 thousand. The latest reading indicated the labor market in the United States remains relatively tight, potentially leading to upward pressure on wages and providing the Federal Reserve with an opportunity to implement further interest rate hikes in its efforts to combat inflation. The four-week moving average, which removes week-to-week volatility, was slightly down at 244.25 thousand.
Have a great weekend,
Taylor Marr