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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.”
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.”