Housing construction in the U.S. during the brief COVID-19 recession, to that recovery, and now in the new housing recession, is going to go down in history as one of those crazy data lines we lived through. Just to give you some perspective here, at the peak of 2005, we had about 2.24 million housing completions in the monthly report. Today, even with over a decade of building growth, we are at 1.342 million.

The latest Census report shows that in August, privately owned housing completions were 5.4% below the revised July estimate of 1.419 million, but 3.1% above the August 2021 rate.

As you can see below, this chart speaks volumes, and trust me when I say this: the builders are going to take it nice and slow on completions until they know they can sell 9.84 months of homes they have under construction or have not even started yet.

Ladies and gentlemen, welcome to the savagely unhealthy housing market.

Now that mortgage rates have spiked up so much, the housing construction growth we have seen in single-family construction is done. It was a good run and we have legs to go lower in single-family construction until rates fall again.

In this report, housing permits did fall, coming in 10% under the July level and 14.4% below the August 2021 level. This shouldn’t be shocking considering new home sales are falling and monthly supply has spiked for the builders. People have to remember that the builders are here to make money, not to build more homes for the existing home sales market. That market represents their biggest competition, and it’s an army they add to every time they sell a house. Since new homes are more expensive than existing homes, they have to manage their supply according to demand.

My rule of thumb for anticipating builder behavior is based on the three-month average of supply:

• When supply is 4.3 months and below, this is an excellent market for the builders.
• When supply is 4.4 to 6.4 months, this is just an OK market for the builders. They will build as long as new home sales are growing.
• The builders will pull back on construction when the supply is 6.5 months and above. 

I will get more bullish on housing starts, permits, and completion data once the monthly supply data for new homes is below 6.5 months and new home sales are growing. We are clearly not there at all. Per the last report, we are standing at 10.9 months — and only 1.06 months of that supply is a finished product.

• 7.33 months of supply is under construction
• 2.51 months of supply hasn’t even been started yet

Another big difference between now and the peak of the housing bubble is that new home sales were roughly at 1.4 million at the peak, and now the last print is at 511,000. No sales credit boom, no major sales credit bust.

You can really see this in the purchase application data, which is already below 2008 levels today. During the housing bubble years, sales, starts, permits and completions data all moved together in a boom and then a bust. Not the case this time around as we haven’t seen the kind of booming sales market like we saw from 2002-2005.

Housing starts did pick up in this report, but revisions were negative. Again, the monthly reports can swing wildly, but the trend is always your friend. Multifamily construction has held up very well in 2022, while single-family weakness continues. We had a small pick-up in single starts coming off a negative revision print, so some context with that data line.

All in all, we should not be surprised at this housing starts report. As rates keep rising, more and more pressure will be added to the single-family starts data, which can fall a lot more as long as the builders are dealing with their excess supply.

Back in March of this year, when I wrote that the business model for the builders was at risk, this is what I meant. If they can’t sell their product at the prices they want, they will stop building single-family homes until they feel comfortable building again. 

We had this happen in 2018: when rates got to 5%, monthly supply spiked above 6.5 months and the builders paused on construction for about 30 months. However, rates quickly fell in 2019 to stabilize the market place.

That isn’t the case here, as rates keep rising and are much higher than 5%. It’s a much different backdrop for housing, especially after the massive home-price gains since 2020. One thing is for sure, the savagely unhealthy housing market continues. 

The post Housing completion data is now savagely unhealthy appeared first on HousingWire.

Source link

Before the pandemic, the historical average of annualized house price growth was approximately 4%. Yet, pandemic-era dynamics exacerbated an already large housing demand and supply imbalance, fueling record-breaking annual house price growth, peaking at nearly 21%.

Today, as affordability wanes and housing supply ticks up, house price growth is decelerating and will likely continue to trend towards its historical average. Buyers and sellers alike have now anchored their expectation of “normal” to sub-3% mortgage rates, multiple-offer bidding wars, and double-digit annual price growth.

As a result, the “great deceleration” may feel more severe as the housing market comes off its two-year sugar high and shifts to a not-so-new normal. The normalization will look different depending on local market conditions, but a repeat of the housing market crash is unlikely. So, if this time it’s different, what are the forces that will drive the housing market forward or hold it back?

The tailwinds

There remains a deep-seated desire for homeownership, especially among younger millennials who continue to age into their prime home-buying years. This desire is buoyed by the increased ability to work-from-home and the need for more space.

Compared with the fourth quarter of 2021, the homeownership rate in the second quarter of 2022 for households under 35 years old increased by 0.8 percentage points, more than any other age group. The homeownership rate increase happened during a quarter when the 30-year, fixed mortgage rate increased at the fastest quarter-over-quarter pace since 1980.

That’s because buying a home is both a financial and lifestyle decision. While the more than 50% year-over-year decline in affordability will continue to temper millennial homeownership demand in 2022, lifestyle choices that highly correlate with homeownership will persist and keep millennials as the driving force in potential homeownership demand. 

Millennial demand also makes this housing slowdown different from the previous boom and bust. Looking back at the housing bubble in the mid-2000s, house price appreciation was characterized by a surge in demand driven by wider access to mortgage financing and a rise in speculative and fix-and-flip buying. While speculative buying still persists, the primary driver of current housing demand is first-time homebuyers, armed with mortgages that have been underwritten with much stricter lending standards, further mitigating the risk of a housing bust.

The headwinds

Buying a home is the largest financial decision a person will likely make, predicated on one’s lifestyle choices, financial security and economic certainty. Affordability is a concern, especially among first-time homebuyers who do not have the benefit of equity from the sale of a home. Mortgage rates at or above 5% are likely the not-so-new normal and, if house prices don’t moderate sufficiently to offset the affordability loss from higher rates, then potential buyers will continue to lose purchasing power.

Additionally, inflation and the corresponding risk of a Federal Reserve-induced recession with potential labor market consequences remain concerning and are severely impacting consumer confidence. This could weigh on purchase demand, prompting an acceleration in house price moderation.

While increasing from historic lows, housing supply remains a challenge. The recent rise in inventory is more about homes sitting on the market longer than new inventory being added. The months’ supply of existing homes in July 2022 was approximately three months, still below the historical average of six months, but trending toward it.

While more new homes are expected to come to market, existing-home sales are likely to stall. The reason? The rate lock-in effect of higher rates, which incentivizes homeowners to keep their current mortgage and stay in their existing homes. Existing homes historically filter down to the first-time homebuyer, so the ongoing supply shortage will continue to weigh on the housing market, and particularly first-time homebuyers.

The likely outcome

The housing market has the demographic wind at its back, which will keep a floor on how low demand can go. The recent pullback in demand is a function of two factors — some buyers can no longer afford to buy given the higher mortgage rate environment and higher home prices, while others are choosing to wait until they feel the economy is on more solid footing. Yet, there remains a long-run shortage in supply relative to demand, which supports a natural moderation of house prices nationally, rather than a sharp decline. 

Indeed, a sharp decline in prices would require a wave of distressed selling, which is unlikely. The housing crisis that triggered the Great Recession was fueled by job losses in combination with homeowners with little to no equity.

While some pockets of the country that became overvalued over the course of the pandemic will face a more severe slowdown, homeowners today have very high levels of tappable home equity, providing a cushion to withstand potential price declines.

Want to learn more about what to expect when it comes to the future of the housing market? This article offers a preview of our upcoming HousingWire Annual Housing Market Super Session that will feature an all-star panel of housing experts. Join us in Scottsdale, Arizona Oct. 3-5 to attend this super session that is designed to help attendees understand macroeconomic data and housing trends for the next year and beyond. To register for HW Annual, go here.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the editor responsible for this story:
Brena Nath at brena@hwmedia.com

The post What does the new normal for first-time homebuyers look like? appeared first on HousingWire.

Source link

In this article

As I begin gathering my thoughts about what might happen next year, I like to look back at my predictions for the previous year to see how I did. It’s useful to look at what I got right and learn from what I got wrong to become a better investor. 

I’m not a professional forecaster and don’t maintain my own economic models. But as an analyst and an investor, I do study tons of data to form a thesis about what is likely to happen in the coming months and years. The point is not to get it all right—that’s impossible. Data is backward-looking, and we can never say for certain what will come next. The point is to understand the most likely scenarios and to form a thesis about the economy that enables confident decision-making. 

I create a lot of content and update my thesis regularly when new data emerges, so I don’t have one concrete “prediction” from last year, but let’s look at some of the themes that made up my 2022 thesis.

A Tale of Two Halves 

In January 2022, I wrote, “I don’t think the dynamics of the housing market will change too much in the coming months. Demand is still strong, supply is still incredibly low, and prices will likely keep going up…Ultimately, what happens in the second half of 2022 is more of a question mark for me. My estimate right now is that cooling will drop year-over-year appreciation to 2% to 7% appreciation rates by year-end.”

A major part of my thesis last year was my strong belief that 2022 would be “a tale of two halves” for the national housing market. We knew the Fed wasn’t going to start raising rates until March, and I felt that given the seasonality of the housing market, price appreciation would peak in Q2, and then the second half of 2022 would see cooling.

Overall, I think I nailed the timing of the market shift. It looked like home prices in many markets peaked in June (while others are still growing), and are now seeing month-over-month declines (which is different from year-over-year, which is how I made my prediction). The shift happened right at the halfway point! The most recent weekly data from Redfin shows year-over-year appreciation at around 6%, which is right in range, but we’ll just have to see if I was right about 2-7% by the end.

The Fed Playbook

In November of 2021, I wrote, “If rates rise quickly, it could cause a shock to the system, and housing prices could slide backwards. But, the Fed is not likely to do that. They will likely try to raise rates as slowly as possible to allow economic expansion and wage growth to counteract the impacts of rising rates. This is what happened post-Great Recession, which was one of the strongest periods of property price growth in American history—despite rising rates. That said, if inflation stays high for too long, or even starts to accelerate, the Fed could be forced to raise interest rates faster than they want to, which could hurt housing prices.“

I think I got the logic here right, but with a caveat (more about that below). I believe the Fed’s intention around the end of 2021 was to follow their old playbook from post-Great Recession and raise rates slowly. I believed that because they said that’s what they would do! 

This wasn’t exactly a hot take. But, I did recognize the very real chance the Fed could be wrong about inflation, and they could be forced to break from its post-Great Recession playbook and raise rates rapidly. And as we all now know, that’s exactly what happened. 

Mortgage Rates

Although I recognized the Fed might be forced to raise rates quickly, I’ll be honest, I did not think interest rates would rise as quickly as they did, as much as they did. I thought supply-side improvements would help moderate inflation sometime in Q1 or Q2 of 2022 (even though increased monetary supply and strong demand would keep inflation relatively high), and then the most likely course for the Fed was to follow their 2009 playbook and raise rates gradually. 

But that’s not what happened. Instead, lockdowns across the globe persisted, and the Russian invasion of Ukraine caused even more supply-side issues. These events, coupled with the increased monetary supply and strong demand, sent the CPI higher than I believed it would go. It remains stubbornly high today, and mortgage rates are hovering around 6.25% as of this writing. 

About those mortgage rates, that’s where things went off the rails for me. On November 21, 2021, I posted this on Instagram (I’m @thedatadeli if you don’t follow me): 

Wow. It burns my eyes just looking at that. When I can’t fall asleep at night, it’s this post that haunts me. 

To be fair to myself, this was posted before the Fed announced three rate hikes in 2022, and we were flying blind, but I figured I’d give you all a good laugh at my expense. And, at least I was very slightly less wrong than Realtor.com, CoreLogic, and Redfin. 

But to be honest, even once the Fed announced three rate hikes in 2022, I still didn’t think we’d have rates as high as we do today. I figured we’d still end 2022 somewhere around 5%. Given that rates are around 6.25% as of this writing, I think it’s safe to say I missed badly on this one. I knew rates were going up to a more ‘normal’ level, but I just didn’t think the Fed would be as aggressive as they have been. I expected inflation to come down sooner, not because of Fed action, but because the supply chain would open up. That didn’t happen, and the Fed is going full throttle on rate hikes with limited success in containing inflation so far. 

Given this, I see more downside risk in the national housing market than I did at the beginning of 2022. The decline in affordability accompanying this rapid rise in rates will weaken demand and put downward pressure on prices. It’s hard to say what will happen from here, but I still believe that a “crash” (20% decline or more) is not the most likely scenario on a national level, but some markets could see crash-level declines. 

The Inventory X Factor 

When we entered 2022, inventory (the number of homes on the market at any given time) was historically low. When inventory is super low, it signals a seller’s market that is likely to see price appreciation. And sure enough, that’s what we saw in the first half of 2022. 

I knew that as rates rose, affordability and demand would fall, typically sending inventory upward. But inventory is not just about demand. It’s also about how many homes are listed for sale. There’s a lot of seller psychology to account for. Most people don’t want to sell their homes for a loss, so in a correcting market, many sellers opt to wait out the correction. I wrote about this idea in May if you want to understand more. 

I honestly wasn’t sure what would happen in the second half of 2022, which is why I considered it the X factor that would ultimately determine if the national housing market remained slightly positive or skewed negative by the end of the year. I landed on the side of “slight modest YoY appreciation” because I was skeptical we would see inventory hit pre-pandemic levels, which turns out to be correct. Whether my price prediction is correct remains to be seen. 

But the simplicity of this national-level chart betrays what’s really going on in the market—the housing market is splitting. Different metros are seeing very different inventory dynamics. 

Just look at the difference in Active Listings between Austin and Boston. 

In Austin, Active Listings are up 60% YoY, which indicates a rapid shift from a seller’s market to a buyer’s market. Pretty easy to see prices coming down in Austin. 

On the other hand, we have Boston, where active listings have been declining! Still a seller’s market here. Prices could still moderate, but on a much smaller scale than in Austin. 

So inventory really is becoming a major X factor! We’ll still have to see this all play out, but it’s definitely the number one thing I’m watching these days. 

Conclusion

Given the complexity of the economic climate in 2022, I think my thesis has held up pretty well so far. Of course, I wish I wasn’t so far off on mortgage rates, but as I said above, the point of developing an investing thesis is not to be right about everything. It’s about formulating an educated understanding of the market that helps you make informed investing decisions. In that respect, I’m pleased with my 2022 thesis because my overall understanding of the market was good and allowed me to make solid investing decisions. 

I locked in low-rate financing on long-term fixed-rate loans, dove more into large multifamily investments to take advantage of long-term supply constraints, and underwrote deals with little to no market appreciation in the next few years, just to be conservative. 

As we approach another year of uncertain economic conditions, I encourage you all to start thinking about your investing thesis for 2023. Take the time now to take stock of the economic climate and the shifting market dynamics. Think about what might happen in your market in the coming year and how you can make strong investing choices given the realities on the ground. What will high rates do to inventory in your area? What asset classes will offer good returns? How do you protect yourself from a potential rise in unemployment rates? 

You shouldn’t be scared of these conditions just so long as you’re prepared for them. There are always deals to be had. You just have to adjust your thesis to fit the market. To learn more about analyzing deals, be sure to check out my new book Real Estate by the Numbers here!

Run Your Numbers Like a Pro!

Deal analysis is one of the first and most critical steps of real estate investing. Maximize your confidence in each deal with this first-ever ultimate guide to deal analysis. Real Estate by the Numbers makes real estate math easy, and makes real estate success inevitable.

I’ll share my 2023 thesis with you all soon.

In the meantime, I’d love for you all to join me in this exercise in the comments. What did you get right about 2022? What did you get wrong? Let’s all share and learn together.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Source link

The housing industry and market watchers in general are preparing for a big week as the Federal Reserve (Fed) is set to announce its next benchmark interest-rate move on Wednesday, Sept. 21, with most observers expecting at least a 75-basis point bump.

Prospects for a historic one percentage point increase, however, remain on the table, according to some market watchers.

“All eyes will be on the Fed this week with their next monetary policy move announced on Wednesday at 2 p.m. with [Fed Chair Jerome] Powell’s news conference afterward,” states financial advisory firm Mortgage Capital Trading (MCT) in its Daily Market Commentary e-newsletter. “Investors are expecting anything in the range of 75- to 100-basis point hike.”

Investment bank Goldman Sachs’ economic-research arm is betting the Fed’s Federal Open Market Committee (FOMC) will boost the federal-funds benchmark by 75 basis points, to a target range of 3% to 3.25%. 

“The bond market is pricing a one-in-four chance of a 100-basis point hike,” Goldman Sachs reports in a FOMC preview delivered by email on Sunday, Sept. 18. “A third ‘unusually large’ hike would be a reversal from the plan Chair Powell laid out in July to slow the pace of tightening, despite little surprise on net in the data.”

Goldman Sachs cites several reasons to expect another large rate bump from the Fed this week, however. Among them are the following: “The equity market threatened to undo some of the tightening in financial conditions that the Fed had engineered, labor market strength reduced fears of overtightening at this stage, [and] Fed officials now appear to want somewhat quicker and more consistent progress toward reversing overheating [fast-rising inflation]….”

Analysts with global financial-services company Nomura Holdings see the FOMC opting for a one percentage point boost in the federal funds rate this week.

“Materializing upside inflation risks are likely to result in the Fed raising rates by 100 basis point [1 percentage point] at the September FOMC meeting, above our previous forecast of 75 basis points,” Nomura states in an analyst note.

The annual U.S. inflation rate was down for the second month in a row in August, to 8.3%, compared with 8.5% in July. Still, the August mark was above market expectations of 8.1%. Core inflation, which excludes energy and food prices, hit 6.3% in August, up from 5.9% recorded in each of the two prior months.

Diane Swonk, chief economist at tax and advisory services giant KPMG, told the Washington Post that said that a 100 basis point boost to the federal funds rate should be on the table, but added that also comes with risks.

“Even though here I am arguing for an even bigger increase, the real issue is rapid increases themselves are destabilizing,” Swonk said.

The CME Group‘s FedWatch tool, which tracks the probability of FOMC rate moves, as of today, September 19, put the probability of a 75-basis point rate hike at 84% — down from 91% a week earlier. Odds for the FOMC lifting the federal funds rate by a full percentage point on Wednesday of this week, to a target range of 3.25% to 3.5%, stood at 16% as of today, up from 0% a week earlier. 

Likewise, FedWatch as of today puts the odds of the FOMC adopting a 50-basis point rate bump at its September meeting at 0%, down from 9% a week earlier.

The Fed’s Federal Open Market Committee (FOMC) has raised the federal funds benchmark rate four times this year, including a 25 basis-point boost in March; a 50 basis-point jump in May; and a 75 basis-point increase in June and again in July — bringing the current benchmark rate to a target range of 2.25% to 2.5%. The rate bump in March represented the first time since 2018 that the Fed has increased rates. 

“[Mortgage] rates have been on an upward trend, with the average 30-year fixed rate topping 6%,” MCT’s daily report states. “With home prices also near multi-year highs, demand has been hampered for many via affordability, which is weighing in on application demand across the country.

“Mortgage rates are under upward pressure this morning as the Fed decision gets closer.”

Following this week’s meeting, the FOMC will meet again in November and December this year.

“We expect 50-basis point hikes in November and December, taking the funds rate to 4% to 4.25% at yearend,” Goldman Sachs’s FOMC preview report states, adding that “we expect the FOMC to slow the pace of rate hikes because … concern about overtightening will eventually rise….”

The post Fed watchers expect at least a 75 bps rate hike appeared first on HousingWire.

Source link

This week’s HW+ member spotlight features Rodney Moss, Executive Vice President at LoanCare.

HW Media: What is your current favorite HW+ article and why?

Rodney Moss: All my favorite articles in HousingWire revolve around servicing innovation – really anything and everything that can help improve the overall experience for homeowners and enhance an asset’s value.

HW Media: What is the best piece of advice you’ve ever received?

Rodney Moss: It was early in my career when I was in investment banking. At the time, I was a financial analyst doing a 100-hour weekly grind when my managing director shared this piece of advice with me: “The business world is divided into two groups of people – processors and rainmakers. You‘ll need to decide which is the one you want to be”.

That was an interesting perspective. I understood that it takes a team effort for a business to be successful but had never thought of what type of role I wanted to pursue. The rainmaker concept really resonated with me and piqued my interest in business strategy and development.

It’s the synergy of market opportunities with business relationships that really energizes me. Creating mutually advantageous partnerships that not only grow revenue but also serves as a catalyst for innovation. 

HW Media: If you could pick a different career path, what would it be?

Rodney Moss:  I would have been a surgeon. I have always been fascinated with that side of the medical field – where highly trained and skilled individuals make critical, often life-saving decisions and then follow through on those decisions with technical procedures and precise movements. However, the requisite 10 years of medical school was a significant detractor for me.

HW Media: When do you feel successful in your job? 

Rodney Moss: I feel like a success at my job whenever all stakeholders involved in a potential, new or existing business relationship feel like “it’s a win” – instances where everyone in our organization is excited about a partnership, everyone on the client side is excited about the partnership, and the customers who we service are benefiting from that partnership – which is to realize a better overall experience.

HW Media: What’s 2-3 trends that you’re closely following?

Rodney Moss: I’m closely following the Mortgage Servicing Rights (MSR) market and how it is functioning right now both in terms of current price levels and active participants. I’m also watching the supply of MSRs, whether they will continue to be trading at record levels, who is buying, and how that will affect the subservicing market. Another trend I’m keeping my eyes on is the increasing use and transparency of servicing data to make better portfolio decisions to manage assets and portfolios more effectively.

HW Media: What keeps you up at night (think of a problem or issue in the housing space) and why?

Rodney Moss:  The affordability problem for first-time homeowners is of considerable concern to me. How are my children going to access the housing market given current price levels and institutional investors buying up properties on an all-cash basis? After all, housing is the largest creator of wealth. But if you cannot access that first home, how is that wealth going to be developed? I don’t think enough attention is being paid to this issue because it affects everyone in our society. 

Join HW+ members and others, to this years HousingWire Annual, go here to register.

To become an HW+ member, click here.

For more information on HW+ benefits, click here.

To view past issues of our HW+ exclusive HousingWire Magazine, go here.

The post HW+ Member Spotlight: Rodney Moss appeared first on HousingWire.

Source link