Current Climate – 09.28.23

Employment – Total nonfarm payroll employment rose by 187,000 in August, 31% less than the average monthly gain of 271,000 over the prior 12 months. The unemployment rate, which had ranged between 3.4% and 3.7% since March 2022, jumped to 3.8% in August. Job gains were strongest in healthcare, leisure and hospitality, social assistance and construction.

• Construction employment continued to trend upward in August (+22,000), slightly higher than the average monthly gain over the prior 12 months (+17,000). According to Statista, the construction sector employed nearly 8.0 million people in the United States in August, the highest level since tracking began in January 2000.
  
  
• Employment in leisure and hospitality increased by 40,000 in August, less than the 61,000 per month average over the prior 12 months. Employment in the industry remains below the pre-pandemic level by 290,000 jobs or 1.7%.

The Economy – Based on the U.S. Bureau of Economic Analysis (BEA) Q223, real gross domestic product (GDP) increased at an annual rate of 2.1% in the second quarter of 2023. In the first quarter, real GDP increased 2.2% (revised). The increase in Q2 primarily reflected increases in consumer spending and business investment that were partly offset by a decrease in exports. Imports, which are a subtraction in the calculation of GDP, decreased. The Atlanta Fed GDPNow initial Q3 forecast calls for an annual rate of 3.5%.

• Inflation, as reflected by the Consumer Price Index (CPI) jumped 0.6% in August on a seasonally adjusted basis after increasing 0.2% in July. Over the last 12 months, the all items index increased 3.7% before seasonal adjustment. The shelter index rose again for the 40^th consecutive month, up 0.3%, but down from July (0.4%) and the beginning of the year when it was up 0.8% in February.
  
  
• The Conference Board Leading Economic Index® (LEI) for the U.S. declined by 0.4% in August to 105.4 (2016=100), following a decline of 0.3% in July. The LEI was down 3.8% over the six-month period between February and August 2023—little changed from the 3.9% contraction over the previous six months (August 2022 to February 2023). With August’s decline, the US Leading Economic Index had fallen for 18 months straight, suggesting that the economy is heading into a  challenging growth period
  

Housing Trends – The U.S. Census Bureau recently announced that the homeownership rate stood at 65.9% in Q2 2023, not statistically different quarter-over-quarter or year-over-year.

National vacancy rates in Q2 2023 were 6.3% for rental housing and 0.7% for homeowner housing. While the rental vacancy rate was higher on a year-over-year basis, up from 5.6% in 2022, it was not statistically different from the Q1 2023 rate. The homeowner vacancy rate was lower year-over-year (down from 0.8%) and not statistically different quarter-over-quarter.

• Realtor.com’s Monthly Housing Market Trends Report for August showed that the number of homes actively for sale decreased 7.9% over the year and the total number of unsold homes, including those under contract, declined 9.2% year-over-year.  August was the fourth month in a row that total listings declined on a year-over-year basis. Active inventory remained 47.8% below typical 2017 to 2019 levels.
  
  
•  On a regional basis, the West suffered the greatest decline in active listings, dropping 31.5% over the year. The South dropped a comparatively meager 1.5% while the Midwest and Northeast saw declines of 13.5% and 19.3%, respectively.
  
  
• Listing prices resumed their upward trajectory over the year in August, spurred by persistently low inventory conditions despite subdued demand resulting from rising mortgage rates. The national median list price stood at $435,450 in August, down slightly from $440,000 in July. The percentage of homes with price reductions decreased from 19.3% in August 2022 to 16.2% this year.
  
  
• The typical home spent 46 days on the market in August, five days longer the same time last year, but 13 fewer days than in August 2017, 2018, and 2019. Time on market increased in 35 of the 50 largest metropolitan areas.      
  
  
• Fannie Mae’s Home Purchase Sentiment Index (HPSI) increased 0.1 percentage point to 66.9 in August. The increase is attributed to net increases in selling conditions, mortgage rate outlook, change in household income, and decreases in job loss concerns and home price outlook. Buying conditions remained the same over the month.
  
  
• In August, the net share of consumers saying it is a good time to buy remained at 18% while those saying it is a bad time to buy remained at 82%, reflecting survey highs.
  
  
• Approximately 41% of survey respondents expect housing prices to rise over the ensuing 12 months, up from 33% one year prior.

Homebuilder confidence – After rising steadily for seven consecutive months, builder confidence retreated in August on rising mortgage rates. The stubbornly high shelter inflation continues to erode housing affordability and dampen consumer demand.

• According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released August 15th, rising mortgage rates are causing more builders to use sales incentives to attract home buyers. After dropping steadily for four months (from 31% in March to 22% in July), the share of builders cutting prices to bolster sales rose again to 25% in August. The average decline for builders reducing prices remained at 6%. The share of builders using incentives to bolster sales was 55% in August, higher than in July (52%) but still lower than in December 2022 (62%)
  

Existing Home Sales – The National Association of Realtors reports that existing home sales receded 0.7% month-over-month in August to an annual rate of 4.04 million. The current sales activity reflects a 15.3% year-over-year decline.

• Three of four regions saw single-digit month-over-month contractions while sales remained flat in the Northeast. On a year-over-year basis, all regions were down ranging from 12.4% in the South to 15.7% in the West, 16.4% in the Midwest and 22.6% in the Northeast.
  
  
• NAR calculates total housing inventory at the end of August to be 1.1 million units or the equivalent of a 3.3- month supply at the current sales pace. While inventory remained relatively flat over the month it was down 14.1% over the year.
  
  
• The median existing home sale price for all housing types rose 3.9% month-over-month in August  to $407,100. August represented the third consecutive month the median price surpassed the $400,000 mark. Prices rose by single digits in all four regions, up the most in the Midwest (6.8%) and Northeast (5.8%) on a year-over-year basis.
  
  
• Single-family home sales declined to an annual rate of 3.60 million in August, down 1.4% month-over-month and 15.3% year-over-year. The median existing single-family home price was up 3.7% over the year to $413,500 in August.
  
  
• Existing condominium and co-op sales were at an annual rate of 440,000 units in August, up 4.8% over the month but down 15.4% over the year. The median existing condo price was up 6.2% to $354,600 on a year-over-year basis.
  
  
• First-time homebuyers were responsible for 29% of transactions in August, down from 30% in July and identical to August 2022. Individual investors/second homebuyers purchased 16% of homes in August, identical to July 2023 and August 2022.
  
  
• Properties typically remained on the market for 20 days in August, identical to July but up from 16 days in August 2022. Seventy-two (72%) percent of homes sold in August were on the market for less than one month, down from 74% in July and 76% in June.
  

Pending (Existing) Home Sales – Pending home sales dropped a significant 7.1% month-over-month in August and were down 18.7% over the year to a reading of 71.8. On a regional basis, the West retreated the most, sinking 21.4% over the year, followed by the Midwest, down 19.1%. the Northeast (-18.2%) and the South (-17.6%).

New Home Sales Activity – Based on U.S. Census Bureau data, new home sales decreased 8.7% over the month in August but increased 5.8% year-over-year to a seasonally adjusted annual rate of 675,000. At the current sales pace, the estimate of new homes for sale at the end of August stood at 436,000, down 10.3% year-over-year and representing a 7.8-month supply at the current sales pace. According to MishTalk.com, just 76,000 of the estimated new home inventory are actually completed/constructed.

On a year-over-year basis sales were up in three of four regions while the South saw a 9.2% contraction. The West led the sales growth with an increase of 44.1%, followed by the Midwest (+24.2%) and the Northeast (+18.5%).

• The median sales price of new houses sold in August was $430,300, relatively flat over the month but down 2.3% over the year from $440,300. The average sales price also dropped over the year (-3.2%) to $514,000 from $530,800.
  
  
• The most active price range in August was $300,000 to $399,999, accounting for 25.9% of all sales, followed by the $500,000 to $749,9999 price range with a 24.1% share.
  
  
• In combination, the $200,000 to $299,999 and $300,000 to $399,999 price ranges, i.e., the lower end of the market, accounted for 40.7% of sales, identical to the prior month, while homes priced at or above the $500,000 price point accounted for 38.9% of total sales, 5% higher than July.  
  

Zonda PSI and Other New Home Trends – Based on new home contract sales in the select markets tracked by Zonda, and accounting for both cancellations and seasonality, new home sales were estimated at 709,114 in August on a seasonally adjusted annualized basis, reflecting a 0.6% month-over-month gain and an increase of 25.6% year-over-year. On a non-seasonally adjusted basis, 59,097 new homes were sold, 27.6% more than last year and 8.8% above the same month in 2019.

• New Home Prices – Of the new home markets tracked by Zonda, national new home prices continue to increase at a moderate pace. On a year-over-year basis, prices rose 0.2% at the entry-level to $304,203 in August. Move-up home prices rose 0.4% to $528,856 and high-end homes saw a 3.9% increase to $920,772.
  
  
• According to Zonda, , 37% of builders surveyed reported raising prices in August, down from 44% in July while 58% reported holding prices flat, up from 42% in July. Incentives remain common, helping to address affordability constraints; 58% of new home communities tracked by Zonda offered incentives in August reflecting a flat condition on a month-over-month basis. The most effective incentives are mortgage rate buydowns and funds towards closing costs.
  

• Active Community Count – Based on Zonda data, project count remains low. In the month of August there were 13,923 actively selling communities tracked by Zonda reflecting a modest 0.2% year-over-year increase. On a month-over-month basis, the count slipped 1.9%. Total community count in August was 27.6% below the same month in 2019.
  
  
• Community counts fell in 92% of Zonda’s select markets year-over-year, dropping the most in Tampa (-17.4%), Seattle (-16.9%), and Las Vegas (-15.0%).    Austin, Minneapolis and Riverside/San Bernardino reported the most significant growth in community counts, up 15.9%, 14.4% and 10.0%, respectively.
  

• Quick Move-Ins (QMIs) – – Homes that can be occupied within 90 days totaled 26,312 units in August, down 9.4% over the year and 7.0% lower month-over-month. Total QMIs were 80.5% above 2019 levels in August.
  
  
• On a metro basis, 20% of Zonda’s select markets increased QMI counts year-over-year. Markets posting the biggest Y/Y gains were Los Angeles, Salt Lake City, and Las Vegas, 14.5%, 12.6% and 10.4%, respectively.
  
  
• Compared to August 2019 these markets were up 221.1%, 197.8% and 110.6%, respectively. QMIs are down the most (compared to 2019) in Baltimore, New York and San Francisco, -63%, -59%, and -59%, respectively, largely due to limited land and lot availability.
  
  
• Zonda New Home Pending Sales Index (PSI) came in at 145.6 in August representing a 37.1% increase over August 2022. The index is currently 16.4% below cycle highs, down from 18.5% in July.  The markets posting the greatest increases year-over-year were Phoenix (+155.0%), Sacramento (+111.8%) and San Francisco (+70.8%). According to Zonda, these markets slowed significantly last year and have since stabilized, reflecting the large year-over-year percentage increases.
  
  
• Mortgage Movement – According to Black Knight’s latest Originations Market Monitor report, overall rate lock volumes were down for the third consecutive month in August, falling 1.5% from July as purchase volume declined 1.9%. Purchase lock counts were down 22% over the year and were down 34% compared to 2019 (pre-pandemic) levels as higher interest rates and the tightest affordability since the early 1980s constrained demand.
  
  
• Homebuyer affordability declined in August with the national median payment applied for by purchase applicants increasing to $2,170 from $2,162 in July. The average purchase price hovered around $450,000 for the second consecutive month in August and the average loan amount was $352,000.
  
  
• For the week ending September 22^nd, the MBA Composite Mortgage Market Index reflecteda 1.3% decrease in mortgage applications from a week earlier while the seasonally adjusted Purchase Index dropped 2.0%. The unadjusted Purchase Index declined 2.0% over the week and was 27% lower on a year-over-year basis.
  

• The MBA also reports that mortgage rates moved to their highest levels in more than 20 years in the week ending September 22^nd. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances increased to 7.41% from 7.31% a week earlier and the highest since December 2000.
  

• The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances increased to 7.32%, the highest since 2011, while FHA rates were also above the 7% mark at 7.16%, the highest level since March 2022. The average rate for 5/1 ARMs increased to 6.73% from 6.62%, the highest rate since July 2001. According to Black Knight, the share of adjustable-rate mortgages fell consistently in August, dropping to account for 6.56% of all lock activity in August.

In Closing . . .  As existing home inventory continued to remain low in August — the result of homeowners enjoying markedly lower than current 7%+ mortgage rates — there was strong purchase demand for newly constructed homes, which transactions typically included mortgage buydowns and other incentives. According to the August Mortgage Bankers’ Association Builder Application Survey, mortgage applications for new home purchases saw a year-over-year increase of 20.6% in August. This represents a 14.9 percentage point drop from the 35.5% increase reported in July suggesting that while incentives are motivating new home purchase decisions, interest rates are serving to constrain volume.

Caio for now . . .