Category Archives: Finance & Economics

The US housing slump stretched into a seventh month in January. Home prices nationally fell 0.2% from December, according to seasonally adjusted data from S&P CoreLogic Case-Shiller. The index is now down 3% from its record high, reached in June. Prices have continued to soften as seller discounts become more common in a market where buyer demand has been sagging for months. …While prices in January were still higher than they were a year earlier, the pace of gains has cooled. The national index was up 3.8% annually, down from the 5.6% gain in December, non-seasonally adjusted data show. The housing market is now in what’s traditionally its busiest season. But higher borrowing costs and uncertainty over the economy are likely to continue to limit demand this spring.

Uncertainty regarding our latest macroeconomic forecast, which we finalized on March 13, has risen in the wake of the recent turbulence in the banking sector. …However, we don’t believe these events fundamentally change our baseline outlook. We already expected a moderate economic contraction to occur this year, and, historically, turbulence in financial markets and the formal banking sector have often been a characteristic of late business cycle dynamics following monetary policy tightening. …Prior to recent banking events, economic data continued to point to stronger-than-expected growth in the first quarter, including large upward data revisions following the completion of our prior forecast. …We now expect Q1 2023 GDP to grow 0.9 percent annualized, up from our prior expectation of a contraction of 0.4 percent. …For our housing forecast, we revised upward total home sales for Q1 2023 but expect a larger contraction later in the year.

Higher mortgage rates and home prices, as well as increased construction costs contributed to lackluster new home sales in February, but signs point to improvement later in the year. Sales of newly built, single-family homes in February increased 1.1% to a 640,000 seasonally adjusted annual rate from a downwardly revised reading in January, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. However, new home sales are down 19% compared to a year ago. Builders continue to face challenges, [but] the lack of existing home inventory means demand for new homes will rise as interest rates decline over the coming quarters. Indeed, there was an increase for sales of homes not yet started construction in February. There were 15,000 such sales in February (non seasonally adjusted). This is the highest monthly total since March 2022.

There’s a housing shortage in the US and labor constraints means it will last several more years, according to the chief executive of Beazer Homes, Allan Merrill. The US already has a multimillion-home shortage, he said, and with the Federal Reserve attempting to slow down lending and cool the economy by raising interest rates, it’s hard to expect any easing of that shortage. “Long-term [the housing shortage] puts a floor under demand in this country for newly built homes,” Merrill said. “We just have this structural deficit. I don’t see the mechanisms in place that are likely to close that shortage any time soon.” …”[I] just don’t see that from an entitlement standpoint or a labor supply standpoint that we’re likely to make a big dent in that at least over the next several years,” Merrill said.

The Federal Reserve’s monetary policy committee raised the federal funds target rate by 25 basis points but indicated that it was moving to a more data dependent mode as markets digest incoming risks for banks. The Fed is balancing two economic risks: ongoing elevated inflation and emerging risks to the banking system. Chair Powell noted that near-term uncertainty is high due to these risks, as well as impacts from policy actions taken to shore up liquidity. Today’s increase of the fed funds rate moved that target to an upper rate of 5%. The Fed’s projections indicate that additional increases may be in store to achieve the level of tightening necessary to ultimately bring inflation back, over time, to the Fed’s target of 2%. 

Ready for a little good news? …The yearlong drag from the housing market slump is winding down. And while we probably won’t see housing suddenly rocket higher like it did in the middle of 2020, a stabilizing market will help counter any weakness stemming from regional banks. …The concern was that with mortgage rates remaining over 6% heading into 2023, weakness in housing would drag down an economy already slowing, tipping it into recession. But rather than conditions worsening in the first quarter of 2023, they got better.  Homebuilder sentiment has improved for three consecutive months. …Instead of builders sitting on a glut of unsold homes that they had begun building during the pandemic, last week’s housing data showed that the number of single-family homes under construction has fallen to the lowest level since October 2021. And after bottoming in November, single-family housing starts have picked up a bit.

In related coverage by the NAHB: Existing Home Sales Surged in February

Paul Jannke

Paul Jannke, with FEA said, “In 2023 we’re looking at a 7% decline in lumber consumption in North America, which equates to about 4 billion board feet. …A number of factors will keep prices from dropping too much. Prime producers such as BC and the US West Coast have a tight supply of lumber available. Also, sawmills are cutting capacity and even closing, and new mills that are planned are facing difficulties getting up and running. And then there’s housing, the main end use of lumber. …A recession — Jannke predicts a mild one at the end of 2023 or early next year — could dampen demand further. …Home remodeling is expected to decline as much as 5 to 8% from the early-pandemic frenzy. …Another issue on the demand side is… “High inventories means dealers have less urgency to buy wood,” Jannke said. While timber production has fallen, imports from Europe are surging, which means more competition from abroad. 

WASHINGTON – While housing starts are falling, there are other areas of construction – public works, industrial, roads and infrastructure. …A year after the Federal Reserve began a historic drive to arrest inflation with rapid interest rate hikes, Fed officials meeting this week face a wildly confusing economy that by some measures continues operating beyond capacity – a recipe for rising prices – and by others seems to be approaching a serious fissure given how a banking crisis has rattled markets in the last two weeks. As the tightening orchestrated by Fed Chair Jerome Powell hits the one-year mark, the extent of the influence depends on where you look. …Construction: The status of the construction industry shows the Fed’s pandemic-era dilemma. Since the 1970s, declines in housing starts have been followed by drops in construction employment, and been associated with the onset of recession. It is not happening the same way this time. 

It is often said that the Fed raises interest rates until something breaks. Many have already pointed to the failures of Silicon Valley Bank, Silvergate Bank, and Signature Bank as evidence that the Fed “finally broke something.” While the failure of these institutions appears to have occurred without warning, the truth is that warning signs were there all along. The collapses were inevitable given their unconventional funding makeup against the Fed’s misguided policy of overly aggressive interest rate hikes over the last 12 months. The Fed’s past actions in the name of checking inflation also threaten to break — or may already have broken — other critical economic sectors, including the housing market. Much as the Fed was blind to the liquidity crises created by its rapid pace of rate increases, we believe the Fed has also failed to appreciate how severely its actions have imperiled the housing market. 

NAHB recently released its 2023 priced out estimates, showing how higher prices and interest rates affect housing affordability. The new estimates show that 96.5 million households are already not able to afford a median priced new home in 2023 due to the fact that their incomes are insufficient to qualify for the required mortgage under standard underwriting criteria.  If the median new home price goes up by $1,000, an additional 140,436 households would be priced out of the market.  These 140,436 households would qualify for the mortgage before the price increase, but not afterward.

The Conference Board Leading Economic Index® (LEI) for the U.S. fell again by 0.3 percent in February 2023 to 110.0 (2016=100), after also declining by 0.3 percent in January. The LEI is down 3.6 percent over the six-month period between August 2022 and February 2023. …“The LEI fell again in February, marking its eleventh consecutive monthly decline,” said Justyna Zabinska-La Monica at The Conference Board. “Negative or flat contributions from eight of the index’s ten components more than offset improving stock prices and a better-than-expected reading for residential building permits. While the rate of month-over-month declines in the LEI have moderated in recent months, the leading economic index still points to risk of recession in the US economy. The most recent financial turmoil in the US banking sector is not reflected in the LEI data but could have a negative impact on the outlook if it persists.

Data for February showed that new housing construction spiked unexpectedly in February, aided by falling lumber prices during the month while mortgage rates continued to tick higher. Lumber prices jumped Thursday following data showing housing starts on single-family and multi-family homes surged 9.8% last month to 1.45 million units on a seasonally adjusted annual rate, according to data from the Census Bureau. The result overshot median projections of 1.31 million units in a Bloomberg survey of economists. Lumber prices rose 5.8% to $438.60 per thousand board feet. The government’s report showed a 24% rise in starts for multi-family units, or apartment buildings, to 620,000  fronted February’s gain in housing starts. …Lumber prices have returned to pre-pandemic territory, hovering around $400 per thousand board feet over the past few months, a noticeable decline from last year.

Production seems to be holding steady as we finish out Q1. But the numbers in the forest product sector can’t match the highs they enjoyed a year ago. Total industrial production (IP) was unchanged in January at +0.8% year-over-year (YoY) after falling 0.6% and 1.0% in November and December, respectively. In January, manufacturing output moved up 0.9% (+0.4% expected). Within durables manufacturing, wood products (-1.0%) and furniture posted the only losses. Paper (+0.6%) contributed to gains within nondurables. Forest2Market is forecasting quarter-over-quarter (QoQ) changes in total IP to range between ‑4.9% and +3.7% annualized rates during the next 24 months with an overall average of -0.2%. …In the forest products sector, price indices fared somewhat worse:

• Pulp, Paper & Allied Products: +0.5% (+7.8% YoY)
• Lumber & Wood Products: -0.6% (-12.3% YoY)
• Softwood Lumber: -5.1% (-44.1% YoY)
• Wood Fiber: -0.6% (+1.4% YoY)

WASHINGTON, March 16 (Reuters) – U.S. single-family homebuilding and permits for future construction rebounded in February, offering hope that the housing market was probably stabilizing after being hammered by higher mortgage rates. Single-family housing starts, which account for the bulk of homebuilding, increased 1.1% to a seasonally adjusted annual rate of 830,000 units last month, the Commerce Department said on Thursday. Data for January was revised down to show single-family homebuilding falling to a rate of 821,000 units instead of the previously reported 841,000 unit-pace. Single-family homebuilding increased in the Northeast and West, but tumbled in the densely populated South as well as the Midwest. Single-family housing starts dropped 31.6% on a year-on-year basis in February. The housing market has been choked by the Federal Reserve’s most aggressive interest rate hiking cycle since the 1980s to tame inflation. But the worst of the housing market downturn could be over. 

Single-family production remained at an anemic pace in February as builders continue to wrestle with elevated mortgage rates, high construction costs and tightening credit conditions that threaten to be exacerbated by recent turmoil in the banking system. Led by gains in apartment construction, overall housing starts in February increased 9.8% to a seasonally adjusted annual rate of 1.45 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 increased 1.1% to an 830,000 seasonally adjusted annual rate. However, this remains 31.6% lower than a year ago. The multifamily sector, which includes apartment buildings and condos, increased 24% to an annualized 620,000 pace. Despite persistent supply-side challenges, rising builder confidence is signaling a turning point for home building later in 2023.

After four consecutive declines, the producer price index (PPI) for inputs to residential construction less energy (i.e., building materials) rose 0.3% in February 2023 (not seasonally adjusted) follow a 1.1% increase in January. …The trend of ready-mix concrete prices continued its historic pace as the index increased 0.8% in February after gaining 0.7% in January. …The PPI for softwood lumber fell 0.8% in February–the seventh consecutive monthly decline. …The PPI for gypsum building materials climbed 0.5% in February after edging down very slightly the month prior. Gypsum products prices are 12.5% higher than they were a year ago. …Steel mill products prices increased 2.6% in February, more than offsetting the 2.4% decline seen the month prior. …The price of truck, deep sea (i.e., ocean), and rail transportation of freight decreased 0.8%, 0.5% and 1.1%, respectively, in February. Of the three modes of shipping, trucking prices have exhibited the largest slowdown since early 2022.

Although high construction costs and elevated interest rates continue to hamper housing affordability, builders expressed cautious optimism in March as a lack of existing inventory is shifting demand to the new home market. Builder confidence in the market for newly built single-family homes in March rose two points to 44. …This is the third straight monthly increase in builder sentiment levels. …The HMI index gauging current sales conditions in March rose two points to 49 and the gauge measuring traffic of prospective buyers increased three points to 31. This is the highest traffic reading since September of last year. The component charting sales expectations in the next six months fell one point to 47.

Housing starts rise to 1.45 million, versus consensus estimate of 1.31 million. New home construction bounced back in February for the first time in six months, led by apartment buildings, but it’s unclear if the bounce translates into a recovery for the housing market. The numbers: Construction on new U.S. homes rose 9.8% in February to 1.45 million, the government said. The rise in construction of homes follows a decline in January, when housing starts fell by 2%. New home construction is up for the first time in six months. The increase was larger than what Wall Street expected. …Building permits for new homes surged 13.8% to 1.52 million in February. Economists had expected building permits to rise to a 1.34 million rate from January’s initial estimate of 1.34 million. …Overall, housing starts are down year-over-year. The annual rate of total housing starts fell from 18.4% from the previous year.

Consumer prices in February saw the smallest year-over-year gain since September 2021 with an eighth consecutive month of a deceleration. However, the shelter index (housing inflation) continued to rise at an accelerated pace and was the largest contributor to the total increase, accounting for over 70% of the increase. Shelter inflation is a lagging indicator and will primarily be cooled in the future via additional housing supply. …The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose by 0.4% in February on a seasonally adjusted basis, following an increase of 0.5% in January. …The index for shelter rose by 0.8% in February, following an increase of 0.7% in January. The indexes for owners’ equivalent rent (OER) increased by 0.7% and rent of primary residence (RPR) increased by 0.8% over the month.

For 2022, U.S. total number of single-family permits issued year-to-date nationwide reached 972,180. On a year-over-year basis, this is 12.5% below the 2021 level of 1,111,414. Over the first month of 2023, the total number of single-family permits issued year-to-date nationwide reached 53,062. On a year-over-year basis, this is 36.4% below the January 2022 level of 83,404. Year-to-date ending in January, single-family permits declined in all four regions. The Northeast posted a decline of 20.3%, while the West region reported the steepest decline of 46.9%. The Midwest declined by 39.1% and the South declined by 33.5% in single-family permits during this time. …Year-to-date, ending in January, the total number of multifamily permits issued nationwide reached 47,936. This is 2.0% below the January 2022 level of 48,912.