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As mortgage rates hit a 22-year high and existing homeowners continue to stay in their homes, new single family home sales hit a 17-month high in July, according to HUD and U.S. Census Bureau data.
Last month’s data recorded a seasonally adjusted annual rate of 714,000 new single-family home sales, up 4.4% from the revised June rate of 684,000 and is 31.5% above the July 2022 estimate of 543,000. The median sales price of new houses sold in July 2023 was $436,700 and the average sales price was $513,000. First-time buyers now make up 50% of all buyers, up from 45% in 2022 and 37% in 2021.
Chief economist at the National Association of Realtors, Lawrence Yun, said he expects rates will begin decreasing by the end of the year, citing the Fed’s slowing of its interest rate increases. The Mortgage Bankers Association, said they expect the average 30-year mortgage rate to decrease to 5% by the fourth quarter of next year.
Meanwhile, Morgan Stanley reiterated concerns for regional banks. Vishy Tirupattur, its Chief Fixed Income Strategist, said the firm does not accept a growing narrative that “the issues in the sector that erupted in March are largely behind us.” “The ratings downgrades by both Moody’s and Standard & Poor’s,” Tirupattur said, “provide a reminder that the headwinds of increasing capital requirements, higher cost of funding and rising loan losses continue to challenge the business models of the regional banking sector.” While acknowledging that comment periods are open and changes could occur, on the heels of proposed rules around capital requirements, the Fed’s proposed capital rule on implementing capital surcharge for the eight U.S. global systemically important banks, and proposed regulations on new long term debt requirements for banks with assets of $100-700 billion, Tirupattur said “suffice to say that the documents envisage significantly higher capital requirement for much of the U.S. banking sector, and extends several large bank requirements to much smaller banks.”
In short, Morgan Stanley argues the result — supported by the latest Senior Loan Officer Opinion survey and a paper by the San Francisco Fed evaluating regulatory impacts on the real economy — is tighter credit going forward. “The bottom line is that more tightening lies ahead for the broader economy,” . …[and] “the evolution of regulatory policy can weigh on credit formation and overall economic growth.”
A report by Newmark in the Commercial Observer said debt origination volumes in the sector fell 52 percent year-over-year in the second quarter. They said there are also 32 percent fewer lenders than a year ago and lenders have grown “more selective in recent months, demanding lower loan-to-value ratios amid the Federal Reserve’s interest rate hikes.”
Additionally, the Washington Post ran a story this week about what is being referred to as the “urban doom loop” affecting midsized cities if commercial real estate headwinds persist. “The fear is that a commercial real estate apocalypse could spiral out and slow commerce, wrecking local tax revenue in the process. Midsize cities have some of the highest rates of office delinquency, where loan payments on buildings are behind schedule, and the lowest rates of office occupancy,” the Post reported. “The average delinquency rate across the 50 largest metro areas in the country is about 5 percent. But in places like Charlotte in North Carolina or Hartford in Connecticut, it is almost 30 percent, according to data from the real estate analytics company Trepp. Likewise, occupancy rates average about 87 percent. But in Oklahoma City, it is just 71 percent, and 76 percent in both Memphis and St. Louis.”
As the market was expecting, the Fed raised interest rates another quarter point Wednesday afternoon, bringing the federal-funds rate to a range between 5.25% and 5.5%, a 22 year high. There will be eight weeks until the next Fed meeting.
Chairman Jay Powell said there is “uncertainty in the next meeting let alone next year.” Powell also said he believed they “have a shot” at a soft landing in the economy — the ability to achieve inflation reduction without high levels of job loss as has occurred in many past instances of tightening. We’ve been hearing this from some (not all) Wall Street economists more recently, but during the press conference Powell also revealed the independent staff at the Fed is now no longer forecasting a recession, given recent strength in the economy.
Asked directly about the housing market and the prospect of getting supply and demand back into balance, Powell said, citing the constraint of existing homes, “I think we have a ways to go to get back to balance” given that existing homeowners with low rate mortgages see “too much value in their mortgage,” keeping supply tight and continuing to pressure prices. On the other hand, Powell said, even in this rate environment there are a significant number of new buyers. “Hopefully,” Powell said, “more supply comes online” and “we are still living with through aftermath of the pandemic.”
The Mortgage Bankers Association (MBA) said high mortgage rates and low existing inventory led to another annual increase in new home purchases in June. Mortgage applications for new home purchases jumped 26.1% in June from the same period last year, according to the MBA’s builder application survey. Compared with the prior month, applications dropped by 5%, MBA said.
Housing Wire reported that construction of single-family homes specifically designed as rentals is booming. However, there are several states bucking that trend due to regulatory constraints that make investment less attractive.
The shift in commercial real estate since the pandemic — decreased office occupancy and retail activity coupled with higher interest rates — has put the CRE sector under continued strain. That stress has caused banks and other lenders to tighten their standards for new loans and scrutinize existing ones. Reuters reports that big banks are increasing loan loss reserves for commercial real estate although their exposure is relatively low. “While regional banks carry the greatest exposure to the (CRE sector,” Reuter said, “second quarter earnings show that a number of big banks have prepared for potential defaults, primarily on office loans.”
Mortgage and housing trade groups meanwhile this week objected to the Financial Stability Oversight Council (FSOC) proposal to designate nonbank servicers and others as systemically-important financial institutions. MBA said in a letter response that FSOC’s proposed interpretive guidance and a revised analytical framework “signal a renewed effort by the Biden Administration and federal financial services regulators to target non-bank financial companies – including non-bank mortgage servicers – for SIFI designation and subject them to Federal Reserve prudential oversight.”
MBA also reported that Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) may vote Thursday on the interagency proposed changes to capital requirements for banks with assets of $100 billion or more, which may include an increase in residential mortgage capital requirements for large depository banks. “This is disconcerting,” MBA said, “as large increases in capital standards will likely lead to a shift in where mid-sized and regional banks will focus their core businesses and reduce credit availability for all types of lending, including for single-family, multifamily, and commercial real estate.”