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Eyes will be on inflation data coming out this week. The news on that front has been trending positive and suggests the Fed is nearing the end of the rate hiking cycle.
As we’ve been discussing here, the second quarter was strong and the third quarter appears to be holding up on the consumer front as well, as the jobs market softens slightly and corporate earnings weaken (as firms lose pricing power with supply chains are repaired). Unemployment remains at 3.5%, good for consumers but possibly also a source of wage pressure that keeps the Fed inclined to hold rates higher for longer. Though commodity declines in recent months have also been a boon, a recent pop in oil prices complicates the picture.
Joel Kahn of the Mortgage Bankers Association (MBA) summarizes it well: “The incoming economic data continue to convey conflicting signals about the strength of the economy. Indicators of manufacturing and service sector health remain lackluster, measures of inflation have moved lower, while GDP growth in the second quarter was stronger than expected and consumer spending remains resilient.”
Meanwhile, Morgan Stanley’s Michelle Weaver says no less than 1% of mortgages are in the money for refinance after millions jumped on the opportunity of low rates during the pandemic. The effect [of homeowners remaining in homes with lower rates and reducing existing supply] has made it tough for first time homebuyers who have had to remain renters, and has put upward pressure on rents, Waiver said on the Morgan Stanley podcast “Thoughts on the Market.” Her colleague Jim Egan noted that existing single family housing inventories are at 40 years lows and “We say ’40 year lows’ because that’s just as far back as the data goes, this is the lowest we’ve seen that,” Egan said.
Egan also argued that “while affordability is bad, it’s not getting worse” and is likely to improve, and “while supply is tight, it’s not getting tighter”—he believes we are stuck in a range for a while. Egan said while the Case-Shiller index turned negative this year for the first time since 2012, Morgan Stanley forecasts prices will be unchanged over the coming year. And as JPMorgan’s Michael Cembalest pointed out in his recent “Eye on the Market” podcast, the tight supply of existing homes has made the market more resilient to to rising rates. Consumers, however, are continuing to burn off savings, which might run out in 2024, Cembalest said. JPMorgan sees weakness possible for Q4/Q1, with economic growth down to 1%.
On that consumer front, credit card balances continue to climb, the Fed reported, with total indebtedness rising $45 billion in the April-through-June period, an increase of more than 4% — and taking the total amount owed to over $1 trillion, the highest gross value in Fed data going back to 2003. Total household debt rose $16 billion to $17.06 trillion, also a record. Fed researchers said the rise in balances reflects both inflationary pressures as well as higher levels of consumption. The Fed said its measure of credit card debt 30 or more days late rose to 7.2% in the second quarter, up from 6.5% in Q1, which is the highest rate since the first quarter of 2012 (though close to the long-run average). Total debt delinquency rose slightly 3.18% from 3%.
We’ve talked about commercial office challenges facing the market in the many months ahead. A report in the Wall Street Journal is also sounding an alarm on multifamily apartment owners. While vacancy rates are low and rents are high, some owners saddled themselves with too much debt as rents rose, often borrowing more than 80% of the building value from bond markets, the Journal reported. Though most apartment loans are fixed-rate, long-term mortgages, more investors took shorter-term, floating-rate loans during the pandemic. The surge in debt costs last year “threatens multifamily owners across the country,” the Journal said.
CoStar said apartment-building values fell 14% for the year ended in June after rising 25% the previous year, roughly the same as the fall in office values. And although mortgage delinquencies in the multifamily category are low, they are increasing, the Journal reports: “Borrowing costs have doubled, rent growth is slowing and building expenses are rising…Outstanding multifamily mortgages more than doubled over the past decade to about $2 trillion, according to the Mortgage Bankers Association. That is nearly twice the amount of office debt, according to Trepp. The data provider adds that $980.7 billion in multifamily debt is set to come due between 2023 and 2027.”
It’s a busy week for housing data. The National Association of Homebuilder’s (NAHB) reported its sentiment index rose by 1 point to 56, the seventh straight month of gains and the highest level since June 2022 (> 50 is considered positive) as low supply of existing homes for sale continues to drive demand for new construction. Housing starts and building permits are due out, along with existing home sales, jobless claims, and leading U.S. economic indicators.
The Federal Reserve released the results of its consumer survey, revealing that the rejection rate for people applying for credit jumped to 21.8% in June, up from 17.3% in February, the highest level in five years. Credit applications it should be noted, however, have fallen overall the past 12 months to 40.3%, the lowest since October 2020 and down from 40.9% in February, according to the survey. Nevertheless, big banks have said they are setting aside additional capital for loan losses as credit card balances rise and delinquency rates on credit cards and other retail loans continue to rise. Broken down, the Fed survey revealed the rejection rate for auto loans increased the most, to 14.2 percent from 9.1 percent in February, a new series high. For credit cards, credit card limit increase requests, mortgages, and mortgage refinance applications, rates rose to “21.5 percent, 30.7 percent, 13.2 percent, and 20.8 percent, respectively.”
Even as the 30-year fixed-rate mortgage neared the 7% mark, preliminary results from the University of Michigan survey indicate consumer sentiment rose 13% in July, which if it holds would be the second straight month of improvement and the largest over-month gain since 2006 and its highest level since September 2021.
Black Knight’s analysis suggests a bifurcated market. Andy Walden, vice president of enterprise research and strategy, said “The housing market has been reheating as we approach the traditional tail end of the homebuying season.” But credit continues to tighten, Waldron said, and in a constrained market, which has purchases taking a larger share of a reduced origination market, “continued economic uncertainty, tightening credit and affordability concerns have all helped to skew the market toward higher-credit borrowers. In fact, the average credit score among purchase locks hit a record high in June.” “Likewise, the average purchase price rising for the seventh straight month while the average loan amount remained flat suggests lower loan-to-value ratios as well” Waldron said.
According to an analysis by Realtor.com, in this interest rate environment and with the Fed likely to tighten further, they expect home sales to decline by 15.8% for the year, as many potential buyers wait for rates to drop before they are willing to look for a new home. Realtor.com says would-be sellers with existing low rates on their mortgages are holding off, unwilling to enter a market where they would pay a higher rate. Realtor.com also changed its outlook for prices: After forecasting a price rise earlier this year, they now expect a gradual fall in the second half of the year.
Also of note, issuance of agency mortgage-backed securities rebounded strongly in the second quarter of 2023 following nine consecutive quarters of slumping production.
Amidst somewhat surprising signs of resilience this year in the U.S. economy, Fed watchers expect two more rate hikes this year to combat stubbornly high core inflation rates. Goldman Sachs Research’s chief U.S. economist believes a healthy labor market rebalancing that includes a large decline in job openings without an increase in unemployment is a positive sign for the potential for the U.S. to orchestrate a softer landing.
Although initial jobless claims and layoff rates are ticking up, the labor story has a positive side to it — wage growth appears to be coming down, dampening its inflationary pressures, the Goldman Sachs Research group said. Additionally, supply chain problems that recently vexed the economy are continuing to heal, leaving room for rebuilding of inventories that should be deflationary.
Within housing, the dichotomy between existing and new homes construction continues. The National Association of Realtors said existing home sales fell 20.4 percent year-over-year in May, the large annual decline in 11 years. MBA reports that after the 2021 market had set records for purchase ($1.86 trillion) and refinance originations ($2.57 trillion), originations fell to an estimated $2.2 trillion in 2022, and are forecasted to fall further to $1.8 trillion this year. Fannie Mae lowered its 2023 Single-Family Originations Forecast to $1.59 Trillion.
The National Association of Home Builders/Wells Fargo Housing Market Index reported that “solid demand, low existing inventory, and improving supply chain efficiency shifted builder confidence into positive territory in June for the first time in 11 months.” Home construction surged in May and prices of new homes have ticked up, even with interest rates at a 15-year high, surprising some analysts.
Zillow recently issued a report that suggesting there is a deficit of 4.3 million homes, with “roughly 8 million individuals or families who lived in another person’s home in 2021 and just 3.7 million homes for rent or sale.”