Credit Conditions for Builders and Developers Continue to Worsen

2022-11-16T12:17:02-06:00

During the third quarter of 2022, credit continued to become less available and generally more costly on loans for Acquisition, Development & Construction (AD&C) according to NAHB’s Survey on AD&C Financing. To analyze credit availability, responses from the NAHB survey are used to construct a net easing index, similar to the net easing index based on the Federal Reserve’s survey of senior loan officers (SLOOS).  In the third quarter of 2022, both the NAHB and Fed indices were negative, indicating tightening credit conditions.  This was the third consecutive quarter during which indices from both surveys indicated tighter credit.  Moreover, both indices were more negative in the third quarter than they had been in the second, and far more negative than they had been in the first.  In the first quarter of the year, the NAHB net easing index stood at -2.3 before declining to -21.0 in the second quarter and  -36.0 in the third.  Similarly, the Fed net easing index was -4.7 in the first quarter of 2022, but subsequently fell to -48.4 in the second quarter and -57.6 in the third.  In short, the tightening of credit conditions for builders and developers is becoming more widespread. According to the NAHB survey, the most common ways in which lenders tightened in the third quarter were by increasing the interest rate on the loans (cited by 74 percent of the builders and developers who reported tighter credit conditions), reducing amount they are willing to lend (60 percent) and lowering the allowable Loan-to-Value or Loan-to-Cost ratio (46 percent). Meanwhile, the average effective rate (based on rate of return to the lender over the assumed life of the loan taking both the contract interest rate and initial fee into account) increased on three of the four categories of loans tracked in the AD&C Survey: from 9.55 to 9.67 percent on loans for land development, from 8.48 to 9.95 percent on loans for speculative single-family construction, and from 8.63 to 10.76 percent on loans for pre-sold single-family construction. These increases were due to increases in both the contract interest rate and the initial points charged on the loans.  The average contract rate increased from 6.27 to 6.42 percent on loans for land development, from 5.39 to 6.16 percent on loans for speculative single-family construction, and from 5.24 to 5.85 percent on loans for pre-sold single-family construction.  Similarly, average points increased from 0.90 to 0.93 percent on loans for land development, from 0.63 to 0.76 percent on loans speculative single-family construction, and from 0.59 to 0.89 percent on loans for pre-sold single-family construction. On the fourth category of loans in the AD&C survey (for pure land acquisition) the average effective rate declined slightly, from 8.19 percent to 7.97 percent.  Again, this was due to a combined effect of the contract rate and points on the loans moving in the same direction.  The average contract rate on land acquisition loans declined from 6.16 to 6.09 percent, while the average points declined from 0.86 to 0.79 percent. These generally worsening credit conditions are contributing to the weakness in builder confidence reported by NAHB earlier today.  Additional detail on current credit conditions for builders and developers is available on NAHB’s AD&C Financing Survey web page. Related ‹ Builder Confidence Declines for 11 Consecutive Months as Housing Weakness ContinuesTags: ad&c lending, ad&c loans, ADC, construciton loans, construction lending, credit conditions, economics, home building, housing, interest rates, lending

Credit Conditions for Builders and Developers Continue to Worsen2022-11-16T12:17:02-06:00

Mortgage Activity Remains Low Due to Market Uncertainty

2022-11-09T10:17:32-06:00

By Jesse Wade on November 9, 2022 • Per the Mortgage Bankers Association’s (MBA) survey through the week ending November 4th, total mortgage activity declined 0.1% from the previous week and the average 30-year fixed-rate mortgage (FRM) rate rose eight basis points to 7.14%. The FRM rate has risen 33 basis points over the past month and has been above 7% for the past three weeks. The Market Composite Index, a measure of mortgage loan application volume, decreased by 0.1% on a seasonally adjusted (SA) basis from one week earlier. Purchasing activity increased 1.3%, while refinancing activity decreased 3.5% week-over-week. The 1.3% increase in purchasing activity was the first increase in the past six weeks even though purchasing activity has decreased 41.6% on a year-over-year basis. The refinancing activity index is down 86.9% from the same week one year ago, the index has hit its lowest point since August 2000. The refinance share of mortgage activity declined from 28.6% to 28.1% over the week, while the adjustable-rate mortgage (ARM) share of activity slightly increased from 11.8% to 12.0%. With continued increases in FRM rates, buyers are looking for ways to save when purchasing. ARMs offer lower rates than FRMs which has led to an increase in activity with buyers more likely to use an ARM to purchase a home. According to Freddie Mac, the current 5/1-ARM rate is at 5.95%. Related ‹ Revolving Debt Surges as Credit Card Rates Hit 18-Year HighTags: finance, interest rates, mba, mortgage applications, mortgage bankers association, mortgage lending, refinancing

Mortgage Activity Remains Low Due to Market Uncertainty2022-11-09T10:17:32-06:00

Revolving Debt Surges as Credit Card Rates Hit 18-Year High

2022-11-08T16:19:45-06:00

By David Logan on November 8, 2022 • According to the Federal Reserve’s latest G.19 Consumer Credit report, consumer credit growth (ex-real estate) decelerated to a seasonal adjusted annual rate (SAAR) of 6.8% in the third quarter of 2022 after growing at an 8.7% pace in the prior quarter.  Revolving debt increased at a 12.9% rate, more than double the pace of nonrevolving debt (+4.9%). Credit card interest rates reached 16.3%, the highest level since the inception of the data series in 1994. Total consumer credit currently stands at $4.7 trillion, an increase of $100 billion over the second quarter. Revolving and nonrevolving debt accounted for 24.7% and 75.3%, respectively, of non-revolving debt. Nonevolving credit outstanding increased $42.6 billion while the level of revolving debt rose $36.3 billion over the quarter. Between Q2 2020 and Q2 2021, revolving consumer credit outstanding as a share of the total steeply declined as stimulus checks were used to pay down credit card debt. The share has increased each quarter since. With every quarterly G.19 report, the Federal Reserve releases a memo item covering student and motor vehicle loans’ outstanding levels on a non-seasonally adjusted (NSA) basis. The most recent release shows that the balance of student loans was $1.8 trillion at the end of the third quarter while the amount of auto loan debt outstanding stood at $1.4 trillion. Together, these loans made up 88.9% of nonrevolving credit balances (NSA), down 0.1 percentage point from Q2 2022. Related ‹ Concentration of Large Builders in Metropolitan Markets- Update (2021)Tags: auto loans, consumer credit, consumer debt, credit, credit cards, Federal Reserve, interest rates, non-revolving debt, nonrevolving debt, revolving debt

Revolving Debt Surges as Credit Card Rates Hit 18-Year High2022-11-08T16:19:45-06:00

An End to Large Rate Hikes from the Fed?

2022-11-02T15:19:16-05:00

Continuing its tightening of financial conditions to bring the rate of inflation lower, the Federal Reserve’s monetary policy committee raised the federal funds target rate by 75 basis points, increasing that target to an upper bound of 4%. This marks the fourth consecutive meeting with an increase of 75 basis points and pushes the fed funds rate to a 15-year high. These supersized hikes were intended to move monetary policy more rapidly to restrictive policy rates. The Fed’s leadership has previously signaled they intend to hold these restrictive rates for a substantial period time, perhaps into 2024. Importantly, the November policy statement also contained hints of a pivot to a slower rate of hikes in the future. While noting that additional rate increases are required to bring inflation down to the Fed’s 2% target (with a higher than previously expected top rate), new messaging in the statement suggests a slowing of the size of the rate hikes. The Fed “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” This verbiage indicates the Fed will adjust its future actions based on expected lags with respect to already implemented tightening and will respond to additional signs of a slowing economy. This is a more data dependent and less forecast dependent policy outlook. In general, this policy adjustment is a positive development for housing because the current risk for Fed policy is of tightening too much and bringing on a more severe recession or a financial crisis. The Fed noted that economic activity is experiencing “modest growth.” Adding detail to this, in his press conference Chair Powell appropriately indicated the economy has “slowed significantly from last year’s rapid pace” and the housing market has “weakened significantly largely reflecting higher mortgage rates.” Powell also noted that tightening financial conditions are having negative impacts on the most interest rate sensitive sectors, specifically citing housing. Powell noted that the “housing market needs to get back into a balance of supply and demand.” Of course, the best way to do this is for policymakers to reduce the cost of constructing new single-family and multifamily housing. The Fed also sees labor market softening, with their projections from last month forecasting that the unemployment rate will increase to 4.4% in 2023. This is an optimistic forecast; NAHB projects a rate near 5% at the start of 2024. In September, the Fed’s “dot plot” indicated that the central bank expects the target for the federal funds rate would increase by 75 more basis points in November, and then 50 in December and concluding with 25 points at the start of 2023. This would take the federal funds top rate to near 4.8%. Today’s messaging from the Fed suggests that they are considering a higher terminal rate, perhaps above 5%. Powell also noted that the Fed needs to see a decisive set of data of slowing inflation to judge the appropriate level for the top fed funds rate. However, Powell refused to commit that the Fed is now biased against another 75 basis point increase. Combined with quantitative tightening from balance sheet reduction (in particular $35 billion of mortgage-backed securities (MBS) per month), the combination of past moves and expected, additional rate hikes represents a significant amount of monetary policy tightening over a short period of time. Given this intended policy stance, a hard landing with a mild economic recession is, in our view, highly likely. However, by 2025, the Fed is forecasting a return to a normalized rate of 2.5% for the federal funds rate. Among the clear signs of economic slowing are just about every housing indicator, including ten straight months of declines for home builder sentiment. Indeed, an open macro question is whether the economy experienced a recession during the first half of 2022, during which the economy posted two quarters of GDP declines. The missing element from the recession call: a rising unemployment rate, which is coming. Regardless, given declines for single-family permits, single-family starts, pending home sales, and rising sales cancellations rates, it is clear a housing industry recession is ongoing, with eventual large spillover impacts for the overall economy. In the meantime, housing’s shelter inflation readings have remained hot. Within the September CPI data, owners’ equivalent rent was up 6.7% compared to a year ago. In fact, over the last three months, this measure was increasing at an annualized rate of 8.9%. Rent was up 7.2% compared to a year ago. Housing is also central to the risk of the Fed raising rates too high for too long. Regardless of Fed actions, elevated CPI readings of shelter inflation will continue going forward because paid rents will take time to catch-up with prevailing market rents as renters renew existing leases. This lag means that CPI will show inflationary gains months after prevailing market rent growth has in fact cooled. The core PCE measure, the growth rate of which peaked in early 2022, is better indicator of inflation and suggests the current Fed outlook may now be entering too hawkish territory. It is important to note that there is not a direct connection between federal fund rate hikes and changes in long-term interest rates. During the last tightening cycle, the federal funds target rate increased from November 2015 (with a top rate of just 0.25%) to November 2018 (2.5%), a 225 basis point expansion. However, during this time mortgage interest rates increased by a proportionately smaller amount, rising from approximately 3.9% to just under 4.9%. The 30-year fixed mortgage rate, per Freddie Mac, is near 7% today but will move higher in the months ahead. Moreover, the spread between the 30-year fixed rate mortgage and the 10-year Treasury rate has expanded to approximately 300 basis points as of last week. Before 2020, this spread averaged a little more than 170 basis points. This elevated spread is a function of MBS bond sales as well as uncertainty related to housing market risks. Finally, the Fed has previously noted that inflation is elevated due to “supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.” While this verbiage may incorporate policy failures that have affected aggregate supply and demand, the Fed should explicitly acknowledge the role fiscal, trade and regulatory policy is having on the economy and inflation as well. Related ‹ Third Quarter of 2022 Homeownership Rate at 66%Tags: economics, FOMC, home building, housing, interest rates

An End to Large Rate Hikes from the Fed?2022-11-02T15:19:16-05:00

How Interest Rates Affect Your Home Purchase

2022-10-26T19:14:33-05:00

Your monthly house payment depends on many factors, including the interest rate on your mortgage. Here are some things to keep in mind about interest rates when you’re planning to buy a home. Rates Change Over Time The rate you can get on a loan today will likely vary slightly from yesterday’s or tomorrow’s rate. Over longer periods, rates can fluctuate dramatically. Interest on a 30-year mortgage topped 18% in 1981 and dipped below 3% in 2020. People will predict which direction rates are heading, but no one knows for sure. If you’re concerned rates will rise while you’re looking for a home, some lenders give you the option to lock in a rate for a period of time. Different Loans Charge Different Rates The interest on a 30-year fixed-rate mortgage is typically higher than the rate on a 15-year fixed-rate loan. Interest rates on adjustable-rate mortgages are usually even lower; however, as the name suggests, those rates can change over time. How Much Will a Loan Payment Change? The difference in a monthly payment depends not only on the loan’s interest rate but also the amount of money borrowed. A buyer who borrows $250,000 at 5% will pay $148 more per month than if the rate was 4%. On a $400,000 loan, though, the difference would be $237 each month. Interest rates are just one aspect of a mortgage, and a mortgage is one of dozens of considerations when you purchase a home. Working with a REALTOR® ensures that you have a professional at your side to guide you through the entire process.

How Interest Rates Affect Your Home Purchase2022-10-26T19:14:33-05:00

Fed Raises by 75 Basis Points, Again

2022-09-21T15:19:19-05:00

Continuing its tightening of financial conditions to bring the rate of inflation lower, the Federal Reserve’s monetary policy committee raised the federal funds target rate by 75 basis points, increasing that target to an upper bound of 3.25%. This marks the third consecutive meeting with an increase of 75 basis points. These supersized hikes are intended to move monetary policy more rapidly to restrictive policy rates. And the Fed’s leadership has signaled they intended to hold these elevated rates for a substantial  period time, well into 2024. While committing to a increasingly hawkish policy path that will slow demand and reduce inflation, the Fed also acknowledged that the economy is only growing at a “modest” pace. Moreover, their projections note that the unemployment rate will increase to 4.4% in 2023 (this is an optimistic forecast; NAHB projects a rate near 5% at the start of 2024). The Fed has over the course of recent meetings raised its expectations for the top rate for 2022 from 3.4% to 4.4%. Looking forward, the Fed’s “dot plot” indicates that the central bank expects the target for the federal funds rate will increase by 75 more basis points in November, 50 in December, and then concluding with 25 points at the start of 2023. This would take the federal funds top rate to to near 4.8%. Combined with quantitative tightening from balance sheet reduction (in particular $35 billion of mortgage-backed securities (MBS) per month), this represents a significant amount of monetary policy tightening over a short period. Given this policy path, a hard landing with a mild economic recession is all but unavoidable to bring inflation back to the Fed’s target. By 2025, the Fed is forecasting a return to a normalized rate of 2.5% for the federal funds rate. Among the clear signs of economic slowing are just about every housing indicator, including nine straight months of declines for home builder sentiment. Indeed, an open macro question is whether the economy experienced a recession during the first half of 2022, during which the economy posted two quarters of GDP declines. The missing element from the recession call: a rising unemployment rate, which is coming. Regardless, given declines for single-family permits, single-family starts, pending home sales, and rising sales cancellations rates, it is clear a housing industry recession is ongoing. The pain of this is clear in terms of the large economic impact housing has on the overall economy. Housing (shelter costs) is also key to the risk of the Fed raising rates too high for too long. Elevated CPI readings of inflation will occur going forward because paid rents will take time to catch-up with prevailing market rents as renters renew existing leases. This lag means that CPI will show inflationary gains months after rent growth has in fact cooled. The core PCE measure, which peaked in 2022, is better indicator of inflation and suggests the current Fed outlook may be too hawkish. It is important to note that there is not a direct connection between federal fund rate hikes and changes in long-term interest rates. During the last tightening cycle, the federal funds target rate increased from November 2015 (with a top rate of just 0.25%) to November 2018 (2.5%), a 225 basis point expansion. However, during this time mortgage interest rates increased by a proportionately smaller amount, rising from approximately 3.9% to just under 4.9%. The 30-year fixed mortgage rate, per Freddie Mac, is near 6% today. The expected additional tightening from the Fed is likely to take this rate above 6.5% before the end of the year. Moreover, the spread between the 30-year fixed rate mortgage and the 10-year Treasury rate has expanded to approximately 260 basis points as of last week. Before 2020, this spread averaged a little more than 170 basis points. This elevated spread is a function of MBS bond sales as well as uncertainty related to housing market uncertainty. Finally, the Fed has previously noted that inflation is elevated due to “supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.” While this verbiage may incorporate policy failures that have affected aggregate supply and demand, the Fed should explicitly acknowledge the role fiscal, trade and regulatory policy is having on the economy and inflation as well. Related ‹ Existing Home Sales Fall for Seven Straight Month and Prices SoftenTags: economics, FOMC, home building, housing, interest rates

Fed Raises by 75 Basis Points, Again2022-09-21T15:19:19-05:00

Mortgage Activity Falls as Rates Top 6%

2022-09-15T12:18:52-05:00

By David Logan on September 15, 2022 • Per the Mortgage Bankers Association’s (MBA) survey through the week ending September 9th, total mortgage activity declined 1.2% and the average 30-year fixed-rate mortgage (FRM) rate rose seven basis points to 6.01%. The FRM rate has increased 56 bps over the past month reaching a 14-year high. The Market Composite Index, a measure of mortgage loan application volume, decreased by 1.2% on a seasonally adjusted (SA) basis from one week earlier. Purchasing activity increased 0.2% while refinancing fell 4.0%. Purchase application volume is down 28.7% over the past 12 months, the largest year-over-year decline since April 2020. Similarly, refinance activity index has plummeted 83.0% over the past year and has declined each of the past five weeks. The refinance share of mortgage activity declined from 30.7% to 30.2% over the week. Conversely, the adjustable-rate mortgage (ARM) share of activity increased to 9.1% of total applications, down from 7.4% one month prior. Related ‹ Percent Share of 5,000+ Square Foot Homes Rises in 2021Tags: finance, home purchases, housing finance, interest rates, mba, mortgage applications, mortgage bankers association, mortgage lending, refinancing

Mortgage Activity Falls as Rates Top 6%2022-09-15T12:18:52-05:00

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