Category Archives: Finance & Economics

Lumber prices have gone sideways in the past few months as investors focus on the housing market and the falling commodities market. Lumber was trading at $400 per thousand board feet, which is a few points below the year-to-date low of $361. …There is a likelihood that the housing market will continue struggling in the coming months. In a statement, a Moody’s analyst warned that house prices will drop by between 5% and 10% in the next 2 years. …There are signs that lumber prices are bottoming. On the daily chart, we see that they have struggled moving below the key support level at $361. This price can be said to be a triple-bottom, which is usually a bullish sign. …Lumber could move to the next key resistance point at $534, which is ~35% above the current level.

The retreat in mortgage interest rates during the first quarter of 2023 (from the 20-year peak reached in the fall of 2022) led a record share of adults in the US – 18 percent – to declare having plans to buy a home within a year – the largest share since the inception of this series in 2018. The finding also means the share of prospective buyers jumped 5 points in a single quarter, rising from 13 percent in the final quarter of 2022. Relatively lower interest rates in the first quarter of 2023 also pushed more 1st-time home buyers to enter the market: 71% of all prospective buyers (a series-high) reported this would be their first time buying a home, up from 61% in the final quarter of 2022.

WASHINGTON, DC – Due primarily to an upward revision in recent consumer spending data, Fannie Mae’s ESR Group now forecasts stronger first quarter GDP growth but maintains its belief that economic momentum is running out of steam. While the acute panic following the bank failures in March appears to have subsided, importantly, the banking turmoil occurred during an already-tightening credit cycle, and the ESR Group believes the additional, incremental tightening in credit conditions owing to the financial fallout will contribute to a modest recession beginning in the second half of 2023. …As such, the ESR Group now expects only a single additional 25-basis point hike from the Federal Reserve in May, followed by the re-introduction of monetary easing closer to year-end.

The US housing market is on the verge of bottoming, and that should clear a path for the economy to stick a soft landing, according to a Friday note from Morgan Stanley. The investment bank highlighted that a year of high mortgage rates has put a dent into the housing market, with a record-breaking decline in activity and sales transactions, combined with a mild correction in home prices. Building permits and housing starts are just a couple indicators that have showed weakness amid 6%+ mortgage rates. But housing strategists at Morgan Stanley noted that activity is no longer declining and that means the GDP component related to residential investment could finally turn neutral in the third quarter of this year. “When asked if the housing cycle has bottomed, our short answer is yes…

The Conference Board Leading Economic Index® (LEI) for the U.S. fell by 1.2 percent in March 2023, following a decline of 0.5 percent in February. The LEI is down 4.5 percent over the six-month period between September 2022 and March 2023—a steeper rate of decline than its 3.5 percent contraction over the previous six months (March–September 2022). “The U.S. LEI fell consistent with worsening economic conditions ahead,” said Justyna Zabinska-La Monica, at The Conference Board. …The Conference Board forecasts that economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023.”

Single-family production showed signs of a gradual upturn in March as stabilizing mortgage rates and limited existing inventory helped to offset stubbornly high construction costs, building labor shortages and tightening credit conditions. This is reflected in the slight uptick in builder sentiment in April. Overall housing starts in March decreased 0.8% to a seasonally adjusted annual rate of 1.42 million units… [but] single-family starts increased 2.7% to an 861,000 seasonally adjusted annual rate.  The three-month moving average (a useful gauge given recent volatility) edged down to 841,000 starts. On a year-over-year basis, single-family housing starts are down 27.7% compared to March 2022. The multifamily sector decreased 5.9% to an annualized 559,000 pace for 2+ unit construction in March. The three-month moving average for multifamily construction has been a solid 555,000-unit annual rate. On a year-over-year basis, multifamily construction is up 6.5%.

The number of home sales is definitely way down. …Looking to the future, the greatest issue is the underlying demand for housing, followed by how much of that demand was already met during the two years of extremely low interest rates. Underbuilding has been a common theme of the housing optimists, who think that we have not been building enough. …Demand, however, has been falling over the last half century. Most houses last a long time. …The critical issue, then, is not replacing old housing [but] the creation of new households. And the Census data are sobering. …Since the pandemic began, the United States has had extremely low population growth. …There does seem to have been some underbuilding, but not too much, in the era before the pandemic. …Think of the families who seemed likely to buy their first home in 2023. Most of them bought a house already, when mortgage rates were low.

US housing starts fell in March as a pullback in multifamily projects more than offset a pickup in construction of single-family homes. Beginning home construction fell 0.8% to a 1.42 million annualized rate, according to government data released Tuesday. Multifamily starts dropped 5.9%, while single-family homebuilding increased 2.7% to a three-month high.  The rise in one-family home construction may reflect builders’ efforts to stoke demand after a spike in borrowing costs sidelined many prospective buyers. With inventories constrained in the resale market, homebuilders have an opportunity to fill the void with new construction. However, the industry faces headwinds that include tighter loan standards for borrowers and mortgage rates that are twice as high as they were at the end of 2021. Applications to build, a proxy for future construction, dropped 8.8% to an annualized rate of 1.41 million units due to fewer permits for multifamily projects. However, permits for one-family dwellings advanced to a five-month high.

Builders remained cautiously optimistic in April as limited resale inventory helped to increase demand in the new home market even as the industry continues to grapple with building material issues. Builder confidence in the market for newly built single-family homes in April rose one point to 45, according to the NAHB/Wells Fargo Housing Market Index (HMI). …The HMI index gauging current sales conditions in April rose two points to 51 and the component charting sales expectations in the next six months increased three points to 50. This marks the first time these components both returned to the 50+ range since June 2022. The gauge measuring traffic of prospective buyers remained unchanged at 31. This is the first time the traffic component failed to improve in 2023.

The housing market is one of the key tells on the overall health of the economy. …My go-to data point is lumber prices. It’s the cornerstone of one of my primary market risk signals precisely because of what it tells us about the housing market. …Home prices are already on the decline, but several key indicators suggest that an even larger housing crash may be nearing. …Unfortunately, what lumber is telling us right now isn’t good. In fact, it hasn’t been for a long time. …In fact, lumber prices are actually lower today than they were at the beginning of 2020, right before the start of the Covid-19 pandemic. Quite simply, low lumber prices mean a lack of demand for building materials. In turn, a lack of demand means home construction slows and builders and home-sellers need to start lowering prices in order to move inventory.

Mortgage rates have eased in recent weeks as the Federal Reserve’s battle against inflation and worries over the banking sector have combined to offer hope that the central bank is close to an end of its aggressive tightening of monetary policy. The rate on a 30-year fixed loan is now a little over 6%, a full point below the 7%-plus level notched last fall. Homebuyers still struggle with the available inventory of homes to buy, so reports on new construction out Tuesday will show how builders are negotiating the uncertain terrain. Estimates are for a drop of 3.5% in the number of housing starts after an increase of 9.8% in February. Building permits for future construction are also expected to dip, by 6.5%, after February’s sharp rise of 13.8%. Thursday brings a report on existing home sales for March, with expectations of a drop of around 2% following the 14.5% increase a month earlier.

According to the latest Producer Price Index report, the prices of inputs to residential construction less energy (i.e., building materials) climbed 0.3% in March 2023 (not seasonally adjusted). Since declining the last four months of 2022, the index has increased three consecutive months by a total of 1.6% but has been relatively stable over the past year. …The trend of ready-mix concrete prices continued its historic pace as the index increased 0.7% in March after gaining 0.9% and 0.6% in January and February, respectively. …The PPI for softwood lumber (seasonally adjusted) fell 4.0% in March–the eighth consecutive monthly decline. The PPI for gypsum building materials decreased 0.1% in March after increasing 0.4% the month prior. …Steel mill products prices increased 1.2% in March after climbing 2.5% in February. …The price of truck, deep sea (i.e., ocean), and rail transportation of freight decreased 2.9%, 0.4% and 0.2%, respectively, in March. 

Consumer prices in March saw the smallest year-over-year gain since May 2021 with a ninth consecutive month of a deceleration. While the shelter index (housing inflation) experienced its smallest monthly gain since November 2022, it continued to be the largest contributor to the total increase, accounting for over 60% of the increase in all items less food and energy. 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. In fact, further tightening of monetary policy will hurt housing supply by increasing the cost of AD&C financing.

Per the Mortgage Bankers Association’s (MBA) survey through the week ending April 7th, total mortgage activity increased 5.3% from the previous week and the average 30-year fixed-rate mortgage rate fell ten basis points to 6.30%. The FRM rate has fallen 41 basis points over the past month. The Market Composite Index, a measure of mortgage loan application volume, rose by 5.3% on a seasonally adjusted basis from one week earlier. Purchasing activity increased 7.8%, while refinancing activity increased 0.1% week-over-week. Purchasing activity has risen over the past month as interest rates have fallen but the seasonally adjusted purchase index was 31.4% lower than one year ago. Refinancing activity has seen a slight uptick over the past month but will remain low as many who refinanced over a year ago locked into lower rates; the Refinancing Index is down 56.9% from one year ago.

Headwinds around apartment construction have lessened a bit this year, with delays becoming less common and price increases slowing, according to the latest edition of the National Multifamily Housing Council’s Quarterly Survey of Apartment Construction & Development Activity.  …Seventy-nine percent of the survey’s respondents reported construction delays in the first quarter — an improvement from 84% in December and 97% in June 2022. Respondents who reported delayed starts cited economic infeasibility as the most common cause, followed by project uncertainty and construction financing availability. …While material prices have risen across almost every category, the increases are much smaller than they were one year ago. Average price increases for exterior finishes and roofing, for example, fell from 14% in March 2022 to 4% in the last quarter.

Less restrictive zoning policies were associated with a less than 1% increase in housing supply within three to nine years after such reforms passed, according to a study the Urban Institute published Wednesday. The researchers found no statistically significant evidence that such reforms increased the availability of affordable housing in that period, however. Reforms that decrease zoning restrictions were associated with a $61 decrease in median gross rent while more restrictive zoning reforms were associated with a $50 increase in median gross rent, the study found. The findings suggest that loosening zoning restrictions can boost the new housing supply, especially for market-rate housing. “But this increase is likely inadequate to increase the availability of housing affordable to low- and middle-income households in the short-term,” the study says. “Cities should consider pairing direct investments in housing subsidies” with looser zoning policies to address short-term and long-term housing affordability, it says.

The ongoing housing recession is expected to continue through the first half of this year, although signs are increasingly pointing to a second-half 2023 turnaround and an even-more-robust rebound in 2024. Among the key statistics and forecasts released in recent weeks by government agencies, research firms and industry-related trade associations were the following

• Housing Starts & New-Home Sales  – The second half of 2023 “could lead to a turning point for housing and the economy… and begin to improve in the latter part of the year, (and) this forward momentum will lead to a calendar year gain for single-family starts in 2024,” said Robert Dietz (NAHB).
• Residential Remodeling – After several years of double-digit gains, expenditures for improvements and repairs to the owner-occupied housing stock are expected to grow only modestly in 2023, according to the Leading Indicator of Remodeling Activity (LIRA). 

In 2021 and continuing into early 2022, construction material costs shot up. …In 2022, an easing in material costs began while, at the same time, bid prices gradually stepped higher. As we move into the Spring of 2023, bid prices on a year-over-year basis, are now considerably higher than material cost increases. In fact, the latter has become negative. …On a y/y basis, bid price increases are presently leaving overall material cost increases in a cloud of dust.  Nevertheless, there are some material cost increases that have not settled back down. …Softwood lumber’s February PPI was -45.1% y/y and -7.4% in the latest quarter. The PPI for particle board and OSB was sent for an even bigger loop y/y, -47.2%, or down by almost half. And it was -15.4% over the latest three months. Gypsum, though, which has a wider type-of-structure market reach, was +11.7% y/y, and it’s been flat in the latest three months, +0.2%.

Private residential construction spending declined 0.6% in February, as spending on single-family construction decreased 1.8%. Spending declined for the ninth month in a row amid elevated mortgage interest rates. Consequently, private residential construction is 5.7% lower compared to a year ago. The monthly decline is largely attributed to lower spending on single-family construction, which has been declining since June 2022. Compared to a year ago, spending on single-family construction was 21.4% lower. …Multifamily construction spending increased by 1.4% in February, after an increase of 0.2% in January. This was 22.2% over the February 2022 estimates, largely due to the strong demand for rental apartments. Private residential improvement spending stayed flat in February and was 8.0% higher compared to a year ago. The remodeling market continues to overperform the rest of the residential construction sector.