The regular monthly release of the New Residential Construction report from the Census Bureau is typically fairly dry. To be fair, this month's update is no exception outside the housing nerd community. But even amid the seemingly soporific data, we can find some interesting themes. First off, there's the fact that construction activity continues to operate near its best levels since before the housing meltdown more than a decade ago. Building permits technically dropped 3.2% from last month, but that's after an upward revision of 1.2%. More importantly, despite the drop, the outright pace of 1.819 million units per year means the last 5 months been over 1.8 million. January 2021 was the only other month over 1.8m going back to 2006. The story is similar for the next construction phase, Housing Starts (a measure of when construction actually begins). Starts held fairly steady at 1.724m, making April the 4th best month since 2006. The gap between permits and starts highlights the first aspect of the current challenges faced by the industry. It's a lot easier to file some paperwork than it is to actually break ground. Moving on to "Housing Completions," we see it's even harder to finish construction. Completions have flat-lined in a range centered on April's level of roughly 1.3 million--the same level as early 2019. Back then, there were almost 600k fewer Housing Starts and Building Permits.
Mortgage application activity, which had been on the rebound this month, suffered its largest loss since mid-February during the week ended May 13. Applications for both refinancing and home purchase took double digit hits. The Mortgage Bankers Association said its Market Composite Index, a measure of mortgage loan application volume, decreased 11.0 percent on both a seasonally adjusted and an unadjusted basis from one week earlier. The Refinance Index dropped 10 percent from the previous week and was 76 percent lower than the same week one year ago. [refiappschart] The Purchase Index fell 12 percent on both an adjusted and unadjusted basis and was 15 percent below its level during the same week in May 2021. [purchaseappschart] “Mortgage applications decreased for the first time in three weeks, as mortgage rates – despite declining last week – remained over two percentage points higher than a year ago and close to the highest levels since 2009. For borrowers looking to refinance, the current level of rates continues to be a significant disincentive,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Purchase applications fell 12 percent last week, as prospective homebuyers have been put off by the higher rates and worsening affordability conditions. Furthermore, general uncertainty about the near-term economic outlook, as well as recent stock market volatility, may be causing some households to delay their home search.”
Homebuilder confidence may still be higher than almost any time before the pandemic, but it's now lower than any time since. The post-pandemic lows arrived abruptly with today's release of the Housing Market Index from Wells Fargo and the National Association of Homebuilders (NAHB). The month-over-month decline was the largest in 2 years and is one of only 3 other times that the index has fallen by 8 points since records began in 1985. Pain points for the housing market are no mystery with prices continuing to increase by roughly 20% year-over-year and mortgage rates hitting the highest levels since 2009 in recent weeks. The net effect is a massive hit to affordability that increasingly sidelines would-be buyers. NAHB notes less than half of new and existing homes are affordable for the average family. Things are even worse for first time and entry-level buyers. The builder confidence index has several components, and they can take turns influencing the headline number. These include current sales, expectations for sales over the next 6 months, and buyer traffic. All three dropped significantly, with a 10 point decline in the 6 month outlook edging out the 9 point drop in buyer traffic and the 8 point drop in current sales.
The volume of commercial and multifamily mortgage loan originations jumped 72 percent in the first quarter of 2022 compared to a year earlier. The Mortgage Bankers Association (MBA) said lenders reported solid increases in all categories of that lending with hotel properties leading the way at 359 percent. While multifamily lending was in fifth place, it still grew 57 percent, behind industrial properties at 145 percent, retail and health care properties (88 and 81 percent, respectively.) Office properties lending increased 30 percent. Commercial and multifamily loan volume was down by 39 percent compared to the fourth quarter of 2021, but MBA said the quarter-over-quarter change was in line with seasonal trends. “The strong momentum in commercial and multifamily borrowing and lending at the end of 2021 carried into the first quarter,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “The continued growth in lending activity is the result of the ongoing strong demand for certain property types like industrial and multifamily , as well as renewed interest in other property types that saw more dramatic declines during the early stages of the pandemic, such as hotel and retail.” “It’s likely that the rise in interest rates will take some wind out of the sails of borrowing in upcoming quarters, but strong market fundamentals, property values and investor interest should continue to support the market,” he said.
Mortgage application volume continued its recovery last week driven by a second strong increase in purchasing activity. The Mortgage Bankers Association said its Market Composite Index, a measure of that volume, gained a seasonally adjusted 2.0 percent and increased 3.0 percent on an unadjusted basis from one week earlier. The seasonally adjusted Purchase Index increased 5 percent on both a seasonally adjusted and an unadjusted basis. It lagged the same week in 2021 by 8 percent. [purchaseappschart] Refinancing, which had eked out its first gain in eight weeks in the previous period, fell back by 2.0 percent and was 72 percent lower than the same week one year ago. The refinance share of mortgage activity decreased to 32.4 percent of total applications from 33.9 percent the previous week. [refiappschart] “The increase in mortgage applications last week was driven by a strong gain in application activity for conventional and government purchase loans, even as mortgage rates rose to their highest level – 5.53 percent – since 2009,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Despite a slow start to this year’s spring home buying season, prospective buyers are showing some resiliency to higher rates. Purchase activity has now increased for two straight weeks. More borrowers continue to utilize ARMs to combat higher rates. The share of ARMs increased to 11 percent of overall loans and to 19 percent by dollar volume.”
Black Knight says the steep ascent of mortgage rates, the 30-year conforming jumped 63 basis points in April, was matched by a sharp drop in rate lock activity. Overall volumes were down 20 percent from March, driven by a 50 percent decline in rate/term refinance activity. Cash-out refinancing fared little better. Homeowners appear unwilling to sacrifice their record-low rate existing first mortgages, seeking instead to access equity by way of home equity lines or second mortgages. Cash-out rate locks fell by 40 percent from March. The combined decline in refinance locks pushed the refi share of the market down to just 20 percent. It was the lowest share in Black Knight’s records which originated in January 2018. The company’s Optimal Blue Product and Pricing Engine (OBPPE) recorded an 11 percent decline in purchase mortgage rate locks but they remained largely unchanged from the prior April, indicating consistent and resilient homebuying demand. Government-backed lending increased during the month, and both FHA and VA lending captured market share from conforming products “Mortgage interest rates continued their steep ascent in April, with our daily interest rate tracker showing 30-year conforming offerings finishing the month at 5.42 percent,” said Scott Happ, president, Optimal Blue, a division of Black Knight. “To put that in perspective, in the last few weeks, we’ve blown through the recent peak seen in 2018 and are now hovering at or near the highest interest rates we’ve seen since the Great Recession.
Consumers opinion about the wisdom of buying a home went underwater in April 2021 and continues to sink. Fannie May says the question about whether it is a good or bad time to buy on its April 2022 National Housing Survey elicited positive responses from only 19 percent of respondents while 76 percent said it was not. This resulted in a net positive score of -57 percent, down 8 points from March and 56 percent year-over-year. The question is one of six from the survey used by Fannie May to construct its Home Purchase Sentiment Index (HPSI). Net positive responses to all declined in April, bringing that measure to 68.5, its lowest level since May 2020, This is down 4.7 point from March. In April 2021, the index read 79.0 Asked the corresponding question about whether it is a good time to sell a home, 72 percent said yes, down 2 points from the prior month. The net positive of 51 percent was up 10 points year-over-year. Seventy-three percent of respondents expect continued increases in mortgage interest rates, while only 5 percent said they would decline and 18 percent think they will remain the same. The net of those expecting lower rates was down 3 points for the month to -68 percent, 21 points lower than a year earlier. “In April, the HPSI fell to its lowest level since the first few months of the pandemic, as consumers continue to report difficult homebuying conditions amid the budget-tightening constraints of inflation, higher mortgage rates, and high home price appreciation,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “The current lack of entry-level supply and the rapid uptick in mortgage rates appear to be adversely impacting potential first-time homebuyers in particular, evidenced by the larger share of younger respondents (aged 18- to 34) reporting that it’s a ‘bad time to buy a home.’ Additionally, consumer perception regarding the ease of getting a mortgage also decreased across nearly all surveyed segments this month, suggesting to us that the benefit of the recent past’s historically low mortgage rate environment appears to have diminished, and affordability is poised to become an even greater constraint going forward. This sentiment is consistent with our forecast of decelerating home sales through the rest of 2022 and into 2023.”
The volume of mortgage application submitted during the week ended April 29 ended a seven-week slide. The Mortgage Bankers Association (MBA) said purchase applications were substantially higher than the prior week while refinance applications held their own. MBA’s Market Composite Index, a measure of application volume, increased 2.5 percent on a seasonally adjusted basis from the prior week and was up 3.0 percent higher on an unadjusted basis. Refinancing has fallen by 71 percent since the comparable week in 2021. [refiappschart] The seasonally adjusted and unadjusted Purchase Indices increased by 4 percent and 5 percent respectively from one week earlier. Purchase applications were down 11 percent year-over-year. [purchaseappschart] Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting commented that, “Treasury yields eased slightly last week but remained close to 2018 highs, as financial markets await the news from the Federal Reserve on its latest plans for rate hikes and reducing its balance sheet holdings. The 30-year fixed rate was 5.36 percent, up over two percentage points from a year ago. The 127-basis point jump in rates over the past two months has triggered a 49 percent drop in refinance activity.” “The purchase market remains challenged by low levels of housing inventory and rapid home-price gains, as well as the affordability hit from higher mortgage rates that are forcing prospective buyers to factor in higher monthly payments. ” But, Kan concluded, “Purchase applications increased for conventional, FHA, and VA loans and were up 4 percent overall. This is potentially a good sign for the spring home buying season, which has seen a slow start thus far.”
Total construction spending continues to roar ahead of its 2021 pace, led again in March by another double digit increase in the residential component. The U.S. Census Bureau says the investment in all types of construction was at a seasonally adjusted rate of $1.731 trillion in March, an 0.1 percent gain compared to February and up 11.7 percent year-over-year. So far in 2022 there has been a total of $376.337 billion spent, 12.0 percent growth compared to the first three months of last year. Spending in the private sector increased 0.2 percent from February to March at an annual rate of $1.380 trillion. The residential share of that spending rose 1.0 percent month-over-month compared to a gain of 0.7 percent in February. The annual rate in March was $88.045 billion, up 18.4 percent compared to March 2021. The non-residential component fell 1.2 percent from the prior month but is still 8.5 percent higher than in March 2021. Na Zhao, analyst for the National Association of Home Builders (NAHB) said the monthly growth in residential spending came from new single-family construction at $472.6 billion a 1.3 percent increase from February and 18.5 percent year over year while multifamily spending slipped 0.5 percent. Spending on home improvements also rose 1.1 percent for the month. Zhao says NAHB’s construction spending index illustrates the solid growth in single-family construction and home improvement from the second half of 2019 to February 2020, when the pandemic hit, and the quick rebound since July 2020. New multifamily construction spending has picked up the pace after a slowdown in the second half of 2019. However, he says home building is still facing supply chain issues, which means the industry is dealing with rising material costs as well as ongoing labor shortages.
Today brought 2 new scheduled data releases for the housing market. Both were fairly logical given the variables in play. So far in 2022, one of the most obvious and troublesome variables for the mortgage market has been the historically rapid rate spike. Average 30yr rates are now at levels not seen since 2009. Big rate spikes don't always affect the purchase market in the same way, but the reaction in terms of refinance applications is highly correlated. As such, it's no surprise to see this morning's application data from the Mortgage Bankers Association (MBA). Purchase applications are also at their lowest levels since the early days of the pandemic, but still at stronger levels relative to the previous 10+ years. While interest rates are weighing on purchases to some extent, it's hard to say how much of the blame they deserve compared to the general cooling effect following the frenzied pace seen in much of 2020-2021. The National Association of Realtors (NAR) concurs on the cooling. Today's report on Pending Home Sales was slightly stronger than economists expected, falling only 1.2% from last month compared to a median forecast calling for a 1.6% drop. But that is the 5th straight month of declines. Here too, outright levels are as low as they've been since the initial months of the pandemic. "The falling contract signings are implying that multiple offers will soon dissipate and be replaced by much calmer and normalized market conditions," said Lawrence Yun, NAR's chief economist. "As it stands, the sudden large gains in mortgage rates have reduced the pool of eligible homebuyers, and that has consequently lowered buying activity."