Category Archives: Finance & Economics

The Federal Reserve’s monetary policy committee increased the federal funds rate to a top target of 5.5% at the conclusion of its July meeting. …After a June pause, the July increase is consistent with a measured hawkishness for the central bank. The Fed indicated… a bias toward additional tightening but under a data-dependent approach with respect to future inflation reports. The Fed stated that economic activity has been expanding at a moderate pace. …It is also surprising that the Fed gave only said. “Inflation remains elevated.” …Approximately 40% of overall inflation is generated from shelter inflation, which can only be tamed by additional affordable attainable housing supply. Higher interest rates for developer and construction loans move the ball in the wrong direction. Nonetheless, shelter inflation will improve going forward. This data suggests the Fed should cease increasing and let, what Chair Powell characterized as currently “restrictive,” rates operate on inflation.

Rising mortgage rates and elevated construction costs put a damper on new home sales last month. …Sales of newly built, single-family homes in June were at a 697,000 seasonally adjusted annual pace, which is a 2.5% decline. However, new home sales are up 23.8% from a year ago. …New single-family home inventory increased 2.8% in June and remained elevated at a 7.4 months’ supply at the current building pace. …The median new home sale price fell 0.5% in June to $415,400 and is down 4.0% compared to a year ago. Stability in building material costs, especially lumber prices, have contributed to a fall in home prices. In terms of affordability, the share of entry-level homes priced below $300,000 has been steadily falling in recent years. Only 12% of the homes were priced in this entry-level affordable range while 33% of the homes were priced above $500,000. The majority of homes (53%) were priced between $300,000-$500,000.

After a year’s worth of warnings about a recession, Federal Reserve chair Jerome Powell said Wednesday that the central bank’s staff no longer forecasts a nationwide economic downturn. It’s welcome news for the economy to achieve a soft landing, a scenario in which inflation falls, unemployment remains relatively low and a recession is avoided. Housing activity, however, will be limited as the impact of tighter policy continues to reverberate through the economy, housing experts and economists projected following the Fed’s decision to raise interest rates by 25 basis points on Wednesday. Mortgage rates are expected to remain elevated… disincentivizing homeowners to move and finance their new home with higher rates. “Higher mortgage rates change the trade-up calculation for existing homeowners and are keeping as many as 1 in 7 out of the market because they don’t want to give up their existing low rate,” Danielle Hale, chief economist at Realtor.com noted.

The Conference Board Consumer Confidence Index® rose again in July to 117.0 (1985=100), up from 110.1 in June. The Present Situation Index improved to 160.0 (1985=100) from 155.3 last month. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—improved to 88.3 (1985=100) from 80.0 in June. Importantly, Expectations climbed well above 80—the level that historically signals a recession within the next year. Despite rising interest rates, consumers are more upbeat, likely reflecting lower inflation and a tight labor market. Although consumers are less convinced of a recession ahead, we still anticipate one likely before yearend. …Dana Peterson, Chief Economist at The Conference Board. “Headline confidence appears to have broken out of the sideways trend that prevailed for much of the last year. …“Expectations for the next six months improved materially, reflecting greater confidence about future business conditions and job availability.”

Mortgage rates’ slow –but steady– march upwards combined with the return of home price gains are doing what they are predicted to: slow housing demand. According to the latest Housing Trends Report, the share of adults with plans to purchase a home within a year dropped to 15% in the second quarter of 2023, down from a record high of 18% in the first quarter. First-time buyers are disproportionately affected by elevated mortgage rates and home prices because they generally lack equity savings from a previous home sale to help with a down payment. In the second quarter of 2023, the share of all prospective buyers who are in the market for the first time dropped to 61%, down significantly from 71% in the first quarter.

Annual expenditures for improvements and repairs to owner-occupied homes are expected to decline at an accelerating rate through the first half of 2024, according to the Leading Indicator of Remodeling Activity (LIRA) released today by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University. The LIRA projects that year-over-year spending on homeowner improvements and maintenance will shrink by 2.7 percent through the first quarter of next year and by 5.9 percent through the second quarter, following a slowdown in growth that began in the final quarter of 2022. Abbe Will, Associate Project Director of the Remodeling Futures Program. “Annual spending on homeowner improvements and repairs is expected to decrease from $486 billion through the second quarter of this year to $457 billion over the coming four quarters.”

Single-family production fell back after four straight monthly gains as elevated construction costs and rising mortgage rates led to a reduction in home building activity and affordability conditions worsened for home buyers. Overall housing in June decreased 8% to a seasonally adjusted annual rate of 1.43 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. …Within this overall number, single-family starts decreased 7% to a 935,000 seasonally adjusted annual rate. The multifamily sector, which includes for-rent apartment buildings and condos, decreased 9.9% to an annualized 499,000 pace for 2+ unit construction in June. …Single-family permits increased 2.2% to a 922,000 unit rate but are down 2.7% compared to a year ago. Multifamily permits decreased 12.8% to an annualized 518,000 pace and is down 31.2% compared to June 2022. The June pace for multifamily permits are at lowest level since late 2020, which is a sign of future apartment construction slowing.

A clearer picture of the pulp market has emerged from the uncertainty that gripped the market a year ago. We are now largely free from the burdens of logistics constraints and pandemic policies, but the volatility in pulp prices witnessed over the past two years remains front of mind. For many in the global pulp industry, skepticism of an extended downturn in the pulp market is still present.

• Pulp inventory volumes are at a record high, with more capacity expansions to come
• Temporary and permanent mill downtime and closures will play an important role in balancing inventories
• Pulp demand will be dictated by shifts in the inventory cycle in the short term
• Production costs play more of a role than ever for pulp producers
• Additional market risks and drivers to watch out for, including China’s economic recovery, US interest rates and the strength of the dollar and sudden shifts in future pulp availability

WASHINGTON — U.S. single-family homebuilding fell in June after surging in the prior month, but permits for future construction increased solidly as a severe shortage of previously owned houses for sale supports new construction. Single-family housing starts dropped 7.0% to a seasonally adjusted annual rate of 935,000 units last month, the Commerce Department said. Data for May was revised up to show starts vaulting to a rate of 1.005 million units, instead of 997,000 units. May’s pace was the highest in 11 months. The housing market has likely reached a bottom after being pushed into recession by the Federal Reserve’s aggressive monetary policy tightening. …Residential investment has contracted for eight straight quarters, the longest such streak since the collapse of the housing bubble triggered the 2007-2009 Great Recession. Permits for future construction of single-family homes increased 2.2% in June to a rate of 922,000 units.

Goldman Sachs revised down the odds of a U.S. recession happening in the next 12 months, cutting the probability down to 20% from 25% on the back of positive economic activity. The investment bank’s chief economist, Jan Hatzius, cited a slew of better-than-expected economic data in a research report released Monday. “The main reason for our cut is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” he said. The chief economist cited resilient U.S. economic activity, saying second-quarter GDP growth was tracking at 2.3%. The rebound in consumer sentiment and unemployment levels falling to 3.6% in June also added to Goldman’s optimism. The U.S. economy expanded 2% at an annualized pace in the first quarter. Last Thursday, data from the Labor Department showed that initial jobless claims fell to 239,000 for the week ended June 24, well below estimates.

Low existing inventory that is keeping demand solid for new homes helped to push builder confidence up in July even as the industry continues to grapple with rising mortgage rates, elevated construction costs and limited lot availability. Builder confidence in the market for newly built single-family homes in July posted a one-point gain to 56, according to the NAHB/Wells Fargo Housing Market Index. This is the seventh straight month that builder confidence has increased and marks the highest level since June of last year. The lack of resale inventory means prospective home buyers who have not been priced out of the market continue to seek out new construction in greater numbers. …The July survey also revealed that despite elevated interest rates, builders’ use of sales incentives has declined. Only 22% of builders report cutting prices in July. This is down from 25% in June and 27% in May.

A surge in US housing starts last month caught traders and analysts by surprise and injected a fresh burst of optimism into wood products markets. Total starts in May climbed 21.7% on a monthly basis to a seasonally adjusted annual rate (SAAR) of 1.631 million units. The jump was the largest by percentage since 2016, and the largest month-over-month increase on a per-unit basis since 1990. Gains were spread across sectors, with single-family starts climbing 18.5% to 997,000 units, and multifamily starts jumping 27.1% to 634,000 units. While single-family construction remained below the year-ago level, multifamily starts were 33.2% higher than May 2022. “Part of what is supporting the new side of the market, despite unfavorable mortgage rates, is still the real lack of existing inventory,” said Jennifer Coskren, Fastmarkets senior economist.

Canadian wildfire smoke continues to blow over much of the U.S., raising air pollution to harmful levels for construction workers. Now, the impact of the fires is likely to raise U.S. lumber prices, too. …That’s bad news for contractors dependent on lumber availability and affordability. The reason why is that Canada supplies approximately 80% of U.S softwood lumber imports. …“The enormity of the fires has given lumber prices a boost, though it is too soon to estimate how much of the affected area includes harvestable timber and how much will catch fire in the months to come,” said FEA’s Marcy Nicholson.” …After price drops for lumber in recent months, economists expect that trajectory to reverse course again, said Mark Fergus, of Cumming Group. “It is expected that the short-term impact of the wildfires will be to temporarily increase costs,” said Fergus. 

Over the first five months of 2023, the total number of single-family permits issued year-to-date (YTD) nationwide reached 357,143. On a year-over-year (YoY) basis, this is 24.7% below the May 2022 level of 473,997. Year-to-date ending in May, single-family permits declined in all four regions. The Northeast posted the lowest decline of 14.7%, while the West region reported the steepest decline of 33.5%. The Midwest declined by 23.9% and the South declined by 22.3% in single-family permits during this time. For multifamily permits, the South is the only region to post a modest increase of 3.2% while the other three regions posted declines. Multifamily permits in the West were down 7.8%, down in the Northeast by 21.7%, and down in Midwest by 23.3%. …Year-to-date, ending in May, the total number of multifamily permits issued nationwide reached 247,005. This is 7.1% below the May 2022 level of 265,751.

According to the latest Producer Price Index report, the price level of inputs to residential construction less energy (i.e., building materials) was unchanged in June 2023 (not seasonally adjusted). March 2023 was the last month prices increased. …The PPI for goods inputs to residential construction, including energy, has decreased 3.6% over the past 12 months—the largest 12-month decline since October 2009. …The PPI for gypsum building materials fell 0.3% in June after declining 1.1% in both April and May. …Steel mill products prices got a reprieve in June, declining 0.6% after a four-month period during which prices climbed 12.4%. …The PPI for softwood lumber (seasonally adjusted) increased 3.9% in June—the second increase over the past three months. …Ready-mix concrete (RMC) prices increased 0.5% in June. …The price of truck and rail transportation of freight decreased 2.1% and 0.4%, respectively, in June while the PPI for deep sea (i.e., ocean) freight increased 0.4%. 

The NAHB/Westlake Royal Remodeling Market Index (RMI) for the second quarter of 2023 posted a reading of 68, edging down 2 points from the first quarter of 2023. Even though the Fed has maintained a hawkish position when it comes to interest rates… the demand for remodeling is holding up despite higher borrowing costs and prices.  The remodeling market is experiencing multiple tailwinds which is supporting this demand, including low inventory especially for existing homes, aging housing stock, increased prevalence for employees to work-from-home (WFH), and high levels of equity for existing homeowners.  Even after the slight decrease, the RMI  remains in positive territory and consistent with NAHB’s forecast that the remodeling sector will grow in 2023, albeit at a slower pace than in 2022.

At the end of the traditional spring buying season, the housing market has shown “distinct signs” of reheating, according to the latest Mortgage Monitor Report from Black Knight. …Home prices increased 0.7% on a sequential basis in May, equating to an annualized growth rate of 8.9%. According to Black Knight, 27 of the 50 largest U.S. metros have returned to their prior home peaks or set new highs during the spring. …For-sale inventory improved modestly during May but is still 51% lower than pre-pandemic levels, continuing to put upward pressure on home prices. Inventory levels have decreased in 95% of major markets. …New construction remains a bright spot in regard to inventory, however, with starts continuing to outpace expectations and reaching their highest level in more than a year. …“As it stands, housing affordability remains dangerously close to its 37-year lows.

Consumer prices in June saw a continued deceleration, with the smallest year-over-year gain since March 2021. Over the past twelve months, inflation has been consistently decelerating. Despite a slowdown compared to the previous month, the shelter index (housing inflation) continued to be the largest contributor to both headline and core inflation, accounting for over 70% of the increase in headline inflation. The Fed’s ability to address rising housing costs is limited as shelter cost increases are driven by a lack of affordable supply and increasing development costs. Additional housing supply is the primary solution to tame housing inflation. The Fed’s tools for promoting housing supply are at best limited. 

Despite inflation, labor shortages and other troubles plaguing the construction industry, some sectors continue to thrive, but others face difficulties as demand for growth slows. “The U.S. economy is chugging along despite significantly higher interest rates,” says Richard Branch, at Dodge Construction Network, but “this is a mixed blessing.” “The resilient economy has kept the construction sector moving forward, but it has also resulted in inflation not slowing enough for the Fed’s liking. The result will be at least one more interest rate increase before the year is through. This will add to the pressure already building in the construction sector and the economy at large.” A recession is still unlikely over the next year, according to Dodge, but the possibility remains “uncomfortably high.” While the public sector is thriving due to funding from the infrastructure act, the private sector faces high interest rates, tighter credit rules and lower demand. 

The U.S. exported 820,057.5 metric tons of wood pellets in May, up from both 720,209.2 metric tons exported in April and 740,605 metric tons exported in May 2022, according to data released by the USDA Foreign Agricultural Service on July 6. The U.S. exported wood pellets to approximately 16 countries in May. The U.K. was the top destination for U.S. wood pellet exports at 482,213 metric tons, followed by the Netherlands at 131,015.1 metric tons and Japan at 105,806.9 metric tons. The value of U.S. wood pellet exports reached $153.12 million in May, up from both $129.17 million the previous month and $131.78 million in May 2022. Total U.S. wood pellet exports for the first five months of 2023 reached 3.72 million metric tons at a value of $684.37 million, compared to 3.52 million metric tons exported during the same period of last year at a value of $595.78 million. [END]

Small U.S. homebuilders are backing off from bringing more houses to the market, discouraged by a banking crisis-led credit squeeze and rising borrowing costs exacerbating the shortage of new homes. The housing market is also reeling with an acute supply squeeze due to a shortage of building materials and labor. …”I see a lot of small builders pulling back on some developments,” said Paul Schwinghammer, of Indiana-based Hallmark Homes. …”I expect tighter lending standards to weigh on housing construction as the year progresses and don’t look for the May pace of starts to be sustained,” said Nancy Vanden Houten at Oxford Economics. The latest Federal Reserve survey on lending practices showed 73.8% of 61 banks said they had tightened their credit standards for construction and land development loans. …The situation may not change soon given small builders are struggling to sell existing inventory, said Kenneth Zener of Seaport Research Partners.