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As we close off 2022, home sentiment improves

As we close off 2022 home sentiment improves
by Brad Cartier, posted in Newsletter

Fannie Mae reported last week on its Home Purchase Sentiment Index (HPSI), which saw its first increase in 9 months. That said, the improvement was modest at 0.6 points, and year over year the index is down just over 17 points.

Home sentiment ticks upward - NMP

Source: NMP (December 2022)

In commenting on the index, Doug Duncan, Fannie Mae’s Chief Economist said:

“Following eight months of consecutive declines, the HPSI did tick up slightly in November but is essentially unchanged since hitting its all-time low last month. Consumers continue to expect mortgage rates to rise but home prices to decline, a situation that we believe will contribute to a further slowing of home sales in the coming months, as both homebuyers and home-sellers have reason for apprehension. We expect mortgage demand to continue to be curtailed by affordability constraints, while homeowners with significantly lower-than-current mortgage rates may be discouraged from listing their property and potentially taking on a new, much higher mortgage rate.”

David Krechevsky of the National Mortgage Professional reports on some other key highlights from Fannie Mae’s report:

  • Buying: The percentage of respondents who said it is a bad time to buy decreased from 80% to 79%. 
  • Selling: The percentage of respondents who said it is a good time to sell a home increased from 51% to 54%, while the percentage who said it’s a bad time to sell decreased from 42% to 39%. 
  • Home prices: The percentage of respondents who said home prices will go down decreased from 37% to 34%. 
  • Mortgage rate: The percentage of respondents who said mortgage rates will go down in the next 12 months increased from 6% to 10%.
  • Income: The percentage of respondents who said their household income is significantly higher than it was 12 months ago increased from 25% to 27%.

In breaking down the data, Sabrina Speianu of notes that a primary reason for below-record sentiment is interest rates, which have been decreasing amid expectations inflation is easing. “While interest rates declined to 6.5% from a peak of around 7% and, possibly improved buying sentiment during the month of November, rates continue to remain higher than years past and the cost of financing 80% of the typical home increased by nearly $900 each month or 70.4% compared to a year ago.”

Construction update

The construction industry has taken a big hit over the past few years with labor shortages, supply chain disruptions, and pandemic lockdowns. Paul Emrath of the National Association of Home Builders (NAHB) reports that that pain is continuing as we head into uncertain economic times. Reportedly, 36% of single-family home builders reported reducing home prices, and 59% offered special sales incentives in November. 

Homebuilder price reductions - NAHB

Source: NAHB (December 2022)

Further, Na Zhao of NAHB reports that building is slowing in exurban areas which experienced strong pandemic-fueled growth.

“Both high mortgage rates and supply-chain disruptions have put a damper on the housing market. The growth rate of single-family construction in large metro outlying counties went down to negative 4.4% in the third quarter of 2022 from 31.9% in the third quarter of 2021. Meanwhile the growth rate in smaller metro outlying countries fell 30.6 percentage points, from 26.5% to negative 4.1%.”

Single family home construction growth slowing - NAHB

Source: NAHB (December 2022)

That said, according to a few other NAHB reports, some positive tailwinds are present for the construction sector. Jing Fu of NAHB reports that the construction industry added 20,000 jobs and the unemployment rate decreased by 0.8% to 4.6%. This was following a 9,000 employment gain in October. Employment levels in residential construction now exceed levels seen in February 2020, prior to the pandemic.

Finally, David Logan of NAHB reports that the Producer Price Index (PPI), which tracks construction inputs, fell by 0.8% in November, providing some good news for builders. Prices did increase on the services side of construction, according to Logan: “[these] prices were propelled higher by large increases in the price of financial and real estate services. The PPI for business loans climbed 14.1% in November and the price of securities brokerage and dealing services soared 24.5%. Trucking and ocean freight costs increased as well.”

Institutional investors

As noted above, it’s been a turbulent time for builders, who went from frenzied demand to a quick cooling as debt costs rose. Blackstone is taking “heat” over limiting withdrawals from its $69 billion private REIT, the Blackstone Real Estate Income Trust (BRIET), according to Jeff Cox of CNBC. Blackstone’s stock fell 8% over the news.

Maurie Backman of The Ascent reports that last month Democrats introduced a new bill called the Stop Wall Street Landlords Act. Reportedly, “its aim is to curb the practice of investment firms with loads of capital scooping up homes for investment purposes, leaving regular buyers unable to purchase homes themselves. If the bill is passed, it will make it more expensive for single-family-rental companies with more than $100 million in assets to buy and sell homes by imposing added taxes on their transactions.”

Wolf Richter of WOLF STREET reported this week that the cancellation rate for new home purchases jumped to 26% in October, up from 8% a year ago.

Cancellation rates increase - WOLF

Source: WOLF STREET (December 2022)

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