by Calculated Risk on 1/18/2023 10:05:00 AM

The National Association of Home Builders (NAHB) reported the housing market index (HMI) was at 35, up from 31 last month. Any number below 50 indicates that more builders view sales conditions as poor than good.

From the NAHB: Builder Confidence Uptick Signals Turning Point for Housing Lies Ahead

A modest drop in interest rates helped to end a string of 12 straight monthly declines in builder confidence levels, although sentiment remains in bearish territory as builders continue to grapple with elevated construction costs, building material supply chain disruptions and challenging affordability conditions.

Builder confidence in the market for newly built single-family homes in January rose four points to 35, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today.

“It appears the low point for builder sentiment in this cycle was registered in December, even as many builders continue to use a variety of incentives, including price reductions, to bolster sales,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga. “The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.”

“While NAHB is forecasting a decline for single-family starts this year compared to 2022, it appears a turning point for housing lies ahead,” said NAHB Chief Economist Robert Dietz. “In the coming quarters, single-family home building will rise off of cycle lows as mortgage rates are expected to trend lower and boost housing affordability. Improved housing affordability will increase housing demand, as the nation grapples with a structural housing deficit of 1.5 million units.”
...
All three HMI indices posted gains for the first time since December 2021. The HMI index gauging current sales conditions in January rose four points to 40, the component charting sales expectations in the next six months increased two points to 37 and the gauge measuring traffic of prospective buyers increased three points to 23.

Looking at the three-month moving averages for regional HMI scores, the West registered a one-point gain to 27, the South held steady at 36, the Northeast fell four points to 33 and the Midwest dropped two points to 32.
emphasis added

Click on graph for larger image.

This graph shows the NAHB index since Jan 1985.

This was above the consensus forecast. 

The "traffic of prospective buyers" is still well below breakeven at 23 (below 50).

by Calculated Risk on 1/18/2023 09:25:00 AM

From the Fed: Industrial Production and Capacity Utilization

Industrial production decreased 0.7 percent in December and 1.7 percent at an annual rate in the fourth quarter. In December, manufacturing output fell 1.3 percent amid widespread declines across the sector. The index for utilities jumped 3.8 percent, as cold temperatures boosted the demand for heating, while the index for mining moved down 0.9 percent. At 103.4 percent of its 2017 average, total industrial production in December was 1.6 percent above its year-earlier level. Capacity utilization dropped 0.6 percentage point in December to 78.8 percent, a rate that is 0.8 percentage point below its long-run (1972–2021) average,
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Click on graph for larger image.

This graph shows Capacity Utilization. This series is up from the record low set in April 2020, and above the level in February 2020 (pre-pandemic).

Capacity utilization at 78.8% is 0.8% below the average from 1972 to 2021.  This was below consensus expectations.

Note: y-axis doesn't start at zero to better show the change.

The second graph shows industrial production since 1967.

Industrial production decreased in December to 104.5. This is above the pre-pandemic level.

The change in industrial production was below consensus expectations.

by Calculated Risk on 1/18/2023 08:40:00 AM

On a monthly basis, retail sales were down 1.1% from November to December (seasonally adjusted), and sales were up 6.0 percent from December 2021.

From the Census Bureau report:

Advance estimates of U.S. retail and food services sales for December 2022, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $677.1 billion, down 1.1 percent from the previous month, but up 6.0 percent above December 2021.
emphasis added

Click on graph for larger image.

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales ex-gasoline were down 0.8% in December.

The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.

Retail and Food service sales, ex-gasoline, increased by 6.8% on a YoY basis.

Sales in December were below expectations, and sales in October and November were revised down, combined.

by Calculated Risk on 1/18/2023 07:00:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

Mortgage applications increased 27.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 13, 2023.

... The Refinance Index increased 34 percent from the previous week and was 81 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 25 percent from one week earlier. The unadjusted Purchase Index increased 32 percent compared with the previous week and was 35 percent lower than the same week one year ago.

“Mortgage application activity rebounded strongly in the first full week of January, with both refinance and purchase activity increasing by double-digit percentages compared to last week, which included the New Year’s holiday observance,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Despite these gains, refinance activity remains more than 80% below last year’s pace and purchase volume remains 35% below year-ago levels.”

Added Fratantoni, “Mortgage rates are now at their lowest level since September 2022, and about a percentage point below the peak mortgage rate last fall. As we enter the beginning of the spring buying season, lower mortgage rates and more homes on the market will help affordability for first-time homebuyers.”
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 6.23 percent from 6.42 percent, with points decreasing to 0.67 from 0.73 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index since 1990.

With higher mortgage rates, the refinance index declined sharply in 2022.

Two weeks ago, the refinance index was at the lowest level since the year 2000, but it has rebounded a little as rates declined.

The second graph shows the MBA mortgage purchase index.

According to the MBA, purchase activity is down 35% year-over-year unadjusted.

Note: Red is a four-week average (blue is weekly).

by Calculated Risk on 1/17/2023 08:33:00 PM

From Matthew Graham at Mortgage News Daily: Old Range is New Again as Markets Wait For Mid-Tier Data

By the middle of December, bond yields made a convincing move down from decades-long highs and settled in a sideways range on CPI/Fed week. We re-entered that same sideways range after last week's CPI (3.42-3.62 in 10yr yields), and now wait for a slew of mid-tier reports to see if they're up to the task of informing a new range breakout. [30 year fixed 6.17%]
emphasis added

Wednesday:
• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:30 AM, Retail sales for December is scheduled to be released.  The consensus is for a 0.8% decrease in retail sales.

• Also 8:30 AM, The Producer Price Index for December from the BLS. The consensus is for a 0.1% decrease in PPI, and a 0.1% increase in core PPI.

• At 9:15 AM, The Fed will release Industrial Production and Capacity Utilization for December. The consensus is for a 0.1% decrease in Industrial Production, and for Capacity Utilization to decrease to 79.6%.

• At 10:00 AM, The January NAHB homebuilder survey. The consensus is for a reading of 31, unchanged from 31 in December. Any number below 50 indicates that more builders view sales conditions as poor than good.

• At 2:00 PM, the Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.

by Calculated Risk on 1/17/2023 03:32:00 PM

Today, in the Calculated Risk Real Estate Newsletter: Homebuilder Price Cuts

A brief excerpt:

A short note on homebuilder price cuts courtesy of Rick Palacios Jr., Director of Research at John Burns Real Estate Consulting (a must follow for housing on twitter!):

From Palacios on Twitter:

Nationally, just 16% of home builders haven't had to drop prices since the market peaked in March 2022. Most builders have dropped prices -6% to -10%. Very different story when you break it out by region however...

There is more in the article. You can subscribe at https://calculatedrisk.substack.com/

by Calculated Risk on 1/17/2023 08:18:00 AM

Way back in 2006 I disagreed with some analysts on the outlook for the Inland Empire in California. I wrote:

As the housing bubble unwinds, housing related employment will fall; and fall dramatically in areas like the Inland Empire. The more an area is dependent on housing, the larger the negative impact on the local economy will be.

So I think some pundits have it backwards: Instead of a strong local economy keeping housing afloat, I think the bursting housing bubble will significantly impact housing dependent local economies.

And sure enough, the economies of housing dependent areas like the Inland Empire were devastated during the housing bust.  

Click on graph for larger image.

This graph shows the unemployment rate for the Inland Empire (using MSA: Riverside, San Bernardino, Ontario), and also the number of construction jobs as a percent of total employment.

The unemployment rate was falling before the pandemic and was down to 3.6% (down from 14.4% in 2010).  During the pandemic, the unemployment rate increased to 15.6%, but is down to 4.2% (NSA).

 And construction employment is up from the lows (as a percent of total employment), but still well below the bubble years.

So, the Inland Empire economy isn't as heavily depending on construction as during the bubble - and will not be as hard hit by the current housing slowdown.

The second graph shows the number of construction jobs as a percent of total employment for the Inland Empire, all of California, and the entire U.S.

Clearly the Inland Empire is more dependent on construction than most areas.  

by Calculated Risk on 1/16/2023 08:20:00 PM

Weekend:
• Schedule for Week of January 15, 2023

Tuesday:
• 8:30 AM: The New York Fed Empire State manufacturing survey for January. The consensus is for a reading of -8.7, up from -11.2.

From CNBC: Pre-Market Data and Bloomberg futures S&P 500 and DOW futures are mostly unchanged (fair value).

Oil prices were up over the last week with WTI futures at $78.85 per barrel and Brent at $84.06 per barrel. A year ago, WTI was at $84, and Brent was at $79 - so WTI oil prices are DOWN 6% year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $3.29 per gallon. A year ago, prices were at $3.27 per gallon, so gasoline prices are up $0.02 per gallon year-over-year.

by Calculated Risk on 1/16/2023 10:38:00 AM

Today, in the Calculated Risk Real Estate Newsletter: The Housing Bubble and Mortgage Debt as a Percent of GDP

A brief excerpt:

In a 2005 post, I included a graph of household mortgage debt as a percent of GDP. Several readers asked if I could update the graph.

First, from February 2005 (18 years ago!):

The following chart shows household mortgage debt as a % of GDP. Although mortgage debt has been increasing for years, the last four years have seen a tremendous increase in debt. Last year alone mortgage debt increased close to $800 Billion - almost 7% of GDP. ...

Many homeowners have refinanced their homes, in essence using their homes as an ATM.It wouldn't take a RE bust to impact the general economy. Just a slowdown in both volume (to impact employment) and in prices (to slow down borrowing) might push the general economy into recession. An actual bust, especially with all of the extensive sub-prime lending, might cause a serious problem.

And a serious problem is what happened!

There is much more in the article. You can subscribe at https://calculatedrisk.substack.com/

by Calculated Risk on 1/16/2023 08:13:00 AM

Altos reports inventory was up 0.3% week-over-week. Usually inventory bottoms in February; last year, in 2022, inventory bottomed in early March.  It is possible that inventory has already bottomed for the year!

Here are the same week inventory changes for the last five years:

2023: +1.3K

2022: -8.4K 

2021: -22.9K

2020: -25.8K

2019: -2.3K

Click on graph for larger image.

This inventory graph is courtesy of Altos Research.

As of January 13th, inventory was at 473 thousand (7-day average), compared to 471 thousand the prior week.   

The second graph shows the seasonal pattern for active single-family inventory since 2015.

The red line is for 2023.  The black line is for 2019.  Note that inventory is up from the previous two years (the record low was in 2022), but still well below normal levels.

Inventory was up 66.6% compared to the same week in 2022, and down 42.0% compared to the same week in 2019. 

A key will be when inventory starts increasing in 2023 (this might have already happened).

Mike Simonsen discusses this data regularly on Youtube.