The Balboa Real Estate Report: 1-29-2023
Things are definitely starting to look up in the housing market, but as the old saying goes, "you gotta crawl before you can walk." These past two weeks have shown some early indications of demand coming back. Homes sales are picking up, mortgage rates are coming down again, and some key building material markets, specifically lumber, are also seeing higher sales.?
Show me the Data!
New data from the Commerce Department this week showed new single-family home sales were up for a third straight month in December. New home sales increased 2.3% to a seasonally adjusted annual rate of 616,000 units last month. November's sales pace was revised lower to 602,000 units from the previously reported 640,000.
This comes as pending home sales increased in December for the first time since May 2022 — following six consecutive months of declines — according to the National Association of Realtors (NAR) this week. The Northeast and Midwest recorded month-over-month reductions, while the South and West posted monthly gains. But all four US regions saw year-over-year decreases in transactions, with the West experiencing the largest decline at 37.5%.
NAR's Pending Home Sales Index (PHSI)* — a forward-looking indicator of home sales based on contract signings — improved 2.5% to 76.9 in December. Year-over-year, pending transactions dropped by 33.8%. An index of 100 is equal to the level of contract activity in 2001.
The increase in pending home sales led NAR's Chief Economist Lawrence Yun to say, "this recent low point in home sales activity is likely over." Yun further added that mortgage rates are the dominant factor driving home sales, and recent rate declines are clearly helping stabilize the market.
And he's right! At least when it comes to mortgage rates.?
The average rate for a 30-year fixed-rate mortgage dropped 2 basis points to 6.13%, according to Freddie Mac, the lowest we've seen in four months and down from the highs of just over 7% seen back in October. Despite this drop, we are still above rates of 5.56% from a year ago.
Mortgage applications are still increasing, though. In fact, mortgage applications increased 7% from one week earlier, according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending January 20. While it might seem like buyers are coming back to the table to get financing, purchase applications were still 39% below where they were a year ago.?
"Homebuying activity remains tepid, but if rates continue to fall and home prices cool further, we expect to see potential buyers come back into the market," said MBA's Vice President and Deputy Chief Economist Joel Kan. "Many have been waiting for affordability challenges to subside."?
Homebuilder sentiment has also improved recently. Last week, the National Association of Homebuilders (NAHB) Wells Fargo national Housing Market Index (HMI) for January was up from December's low of 31 to a more-encouraging 35. Why is this significant? Well because it's the first time in 12 months that we've seen an increase in the HMI. The HMI is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.
So yes, homebuilder sentiment is on the rebound, but there are still economic indicators pointing to a continued recession, at least for the short term.?
This week the US Conference Board Leading Economic Index (LEI) for the US decreased by 1% in December 2022 to 110.5 (2016=100). The December index, which included a weakened outlook for manufacturing, homebuilding, job, and financial markets, follows a decline of 1.1% in November. The LEI is now down 4.2% over the six-month period between June and December 2022—a much steeper rate of decline than its 1.9% contraction over the previous six-month period (December 2021–June 2022).
What is Wall Street Saying?
Despite these positive indicators, this does not mean that the housing market is officially back, not by a long shot. The economic outlook on housing and real estate is still pretty weak as far as Wall Street is concerned.
New home sales have already been trending higher, but pending homes sales only rebounded last month. New January data to be released in February will better indicate what 2023 may have in store for us. We'll also see if positive homebuilder sentiment this month translates into an increase in new home starts and permits when data is released in February.?
In the meantime, one major investment bank has been quite vocal on housing this month. Goldman Sachs downgraded their outlook for the US housing market a few weeks back in a paper titled "Getting worse before getting better." Basically, Goldman forecasted that home prices would drop 6.1% this year, which is more than the 4.1% they originally called back in November.?
However, this past week, the company scrapped that forecast due to positive data and said in another outlook that they expect national home prices to drop just 2.6% this year.?
Still, Goldman is also predicting a crash in some key hot spots for real estate this year. The investment group has not called for a nationwide crash, but warned that residents in four cities in particular could see plummeting values similar to the 2008 housing collapse, according to a note to clients obtained by the New York Post. Those four cities include San Jose, Austin, Phoenix, and San Diego.?
What's Going on with Building Materials?
Lumber prices, a major building component, was up as much as 13% on Friday and comes alongside positive housing data. Lumber futures jumped to $524/ thousand board feet, its highest level since mid-October. The essential building commodity is up 21% since encouraging housing market data was released earlier this week, and is up 37% year-to-date. While it may seem promising that the price of lumber is moving up, keep in mind we are still down from early 2022 highs above $1,300/thousand board.?
Other key markets, such as the resin industry, which makes PVC (plumbing and piping) and nylon (flooring and carpeting), still face a glut of inventory due to weak demand during this global economic slowdown.
Also, one week ago flooring manufacturer Mohawk Industries said it has been impacted by high inflation and weak demand. The company added that flooring market conditions had worsened faster than expected, leading to a longer-than-anticipated idling of its carpet factories.?
My 30-Day Outlook:
With mortgage rates still coming down, expect more potential homebuyers to come back to the market. We're already seeing this with higher mortgage applications. At the same time, however, inventory is still long for homebuilders and the average days on the market for listings were at 67 days in December, which was 11 days longer compared with the same time in 2021. So expect individual home sellers and homebuilders to keep offering incentives.
Sources:
https://www.nar.realtor/newsroom/pending-home-sales-increased-2-5-in-december-ending-six-month-slide
(For insight on resin markets such as PVC and nylon) www.rtiglobal.com