Credit for Builders Less Available, Costs More

2022-08-11T12:16:12-05:00

During the second quarter of 2022, credit became both tighter and more costly on loans for Acquisition, Development & Construction (AD&C) according to NAHB’s Survey on AD&C Financing. 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 substantially from the prior quarter on all four categories of loans tracked in the AD&C Survey: from 6.32 percent to 8.19 percent on loans for land acquisition, from 7.85 to 9.55 percent on loans for land development, from 7.38 to 8.48 percent on loans for speculative single-family construction, and from 7.90 to 8.63 percent on loans for pre-sold single-family construction. Changes in the effective rate may be due to changes in either the contract interest rate, or  in the initial points charged on the loans.  In the second quarter, average points were unchanged from the previous quarter at 0.63 percent on loans for speculative single-family construction, and actually down slightly on the other three categories of AD&C loans: from 0.90 to 0.86 percent on loans for land acquisition, from 0.95 to 0.90 percent on loans for land development, and from 0.63 to 0.51 percent on loans for pre-sold single-family construction.  However, these relatively small changes were overshadowed by strong surges in the average contract interest rate changed on the loans:  from 4.36 to 6.19 percent on  loans for land acquisition, from 4.60 to 6.27 percent on loans for land development, from 4.63 to 5.39 percent on loans for speculative single-family construction, and from 4.61 to 5.24 percent on loans for pre-sold single-family construction. The NAHB survey also produces a net easing index  that summarizes the change in credit conditions, similar to the net easing index constructed from the Federal Reserve’s survey of senior loan officers (SLOOS).  The second quarter of 2022 was the second consecutive quarter during which both the NAHB and Fed indices were negative, indicating tightening credit conditions.  Moreover, both indices were substantially more negative in the second quarter than they had been  in the first.  In the second quarter, the NAHB net easing index stood at -21.0 while the Fed index was -48.4—compared to -2.30 and -4.7, respectively, in the first quarter of 2022. The most common ways in which the lenders tightened in the second quarter were by increasing the interest rate on the loans (cited by 68 percent of the builders and developers who reported tighter credit conditions), lowering the allowable Loan-to-Value or Loan-to-Cost ratio (65 percent) and reducing amount they are willing to lend (61 percent). The results of the second quarter AD&C survey are consistent with the general tightening of financial conditions and rising interest rates reported in a previous post.   More detail, including a complete history for every question in the survey, is available on NAHB’s AD&C Financing Survey web page. Related ‹ Housing Affordability Falls to Lowest Level Since Great RecessionTags: ad&c lending, ad&c loans, ADC, construciton loans, construction lending, credit conditions, economics, home building, housing, interest rates, lending

Credit for Builders Less Available, Costs More2022-08-11T12:16:12-05:00

Refinancing Activity Down 82% Compared to August 2021

2022-08-10T15:17:43-05:00

By David Logan on August 10, 2022 • Per the Mortgage Bankers Association’s (MBA) survey through the week ending August 5th, total mortgage activity increased slightly and the average 30-year fixed-rate mortgage (FRM) rate rose four basis points to 5.47%. The FRM rate has declined 35 bps over the past month but remains roughly 2.5 percentage points higher than it was a year ago. The Market Composite Index, a measure of mortgage loan application volume, increased by 0.2% on a seasonally adjusted (SA) basis from one week earlier. Purchasing activity declined 1.4% while refinancing increased 3.5%. Purchase applications are 18.5% below the August 2021 level and have decreased 17 of 31 weeks in 2022, including five of the last six weeks. The refinance activity index has plummeted 82.0% over the past year and has posted a weekly decline in 22 weeks since the start of 2022. The refinance share of mortgage activity increased from 30.8% to 32.0% over the week. Conversely, the adjustable-rate mortgage (ARM) share of activity decreased to 7.4% of total applications, down from 9.5% one month prior. Related ‹ Has Inflation Peaked?Tags: 30-year fixed-rate mortgage, home purchases, interest rates, mba, mortgage bankers association, mortgage finance, mortgages, refinancing, single-family mortgages

Refinancing Activity Down 82% Compared to August 20212022-08-10T15:17:43-05:00

Federal Reserve Raises by 75 Basis Points and Notes Slowing Economy

2022-07-27T18:19:04-05:00

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 2.5%. This move matches the June rate hike as the largest increase for the funds rate since 1994. While committing to a policy path that will slow demand and reduce inflation pressure, the Fed also, in the first sentence of its July policy statement, acknowledged signs of slowing economic activity (“Recent indicators of spending and production have softened.”). Among the clear signs of this slowing are just about every housing indicator, including seven 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. GDP data for the second quarter published tomorrow will provide additional evidence (although a rising unemployment rate remains missing for the NBER call). However, 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. Market participants have reduced their expectations for future Fed rate hikes, which is perhaps a sign of renewed confidence in the ability of the Fed to bring inflation down (even if it means a recession in the so-called hard landing scenario). Higher interest rates and lower economic growth will eventually bring inflation rates down. The path of required additional tightening will depend on economic growth and inflation data, moving the Fed to a more data dependent stance. Thus, the chance of the Fed decelerating to a 50 basis point hike in September is increasing. 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%. Moreover, the spread between the 30-year fixed rate mortgage and the 10-year Treasury rate has expanded to more than 270 basis points as of this 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. While the 10-year rate has flattened in recent weeks on growth concerns, a reduction in this spread would be a positive sign for mortgage rates and housing demand. 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 ‹ Share of New Home Sales Backed by FHA Loans Reaches 14-Year LowTags: economics, FOMC, home building, housing, interest rates

Federal Reserve Raises by 75 Basis Points and Notes Slowing Economy2022-07-27T18:19:04-05:00

Federal Reserve Accelerates Rate Hikes

2022-06-15T14:15:41-05:00

To fight persistent inflation, the Federal Reserve has committed to significantly cooling demand. This approach reflects a non-monetary policy failure to fix underlying supply-side challenges that are pushing up inflation. The Fed lacks policy tools to make these supply-side fixes, so it must rely on demand-side impacts to bring down inflation by reducing economic growth. Consequently, at the conclusion of its June meeting, the Fed raised the federal funds target rate by 75 basis points, increasing that target to an upper bound of 1.75%. This is the largest increase for the funds rate since 1994 and is a clear response to elevated inflation data from May. Moreover, the Fed’s forward-looking projections indicate on a median participant basis an additional 205 basis points of tightening through 2023. Without convincing evidence of moderating inflation, the Fed is likely to continue to raise the target rate at each meeting by 50 basis points or more. The Fed’s target is a 2% inflation rate. The Fed’s June statement also confirmed its existing plan to reduce its balance sheet, including net reduction of $35 billion of mortgage-backed securities a month when fully phased in. The lack of change for the balance sheet reduction plan is a positive element of today’s news for housing, as there was a risk of a planned faster pace, which would further increase mortgage interest rates. Given signs of slowing economic activity, including six straight months of declines for home builder sentiment, a clear risk is that by falling behind the curve, the Fed will overshoot on tightening and bring on a recession as it fights inflation. This would not be the soft landing the Fed is attempting to orchestrate. Indeed, the NAHB economic forecast now includes a 2023 recession as financial conditions tighten. Chair Powell noted in his press conference that housing market conditions are slowing given higher mortgage rates. The Fed notes that inflation remains elevated, citing the Ukraine war and global supply-chain issues, among other factors. Their revised economic projections find slowing economic growth, with a GDP outlook for 2023 of 1.7%. This will be very difficult to achieve. The Fed’s unemployment projection sees that rate increasing to 4.1% through 2024.  So even under this optimistic outlook, this increase for joblessness would qualify as a growth recession. As this economic slowing occurs, the Fed’s projections indicates inflation will decline. Using the core PCE measure, the Fed sees a 4.3% rate for 2022, then 2.7% in 2023 and falling to 2.3% in 2024. This too will be difficult to achieve given the lagged impact on inflation from increasing residential rents, which materialize in inflation readings on a lagged basis when leases are renewed. This shelter impact on inflation is also a reminder that tightening interest rate conditions can affect supply, not just demand. Higher rents are due to a lack of housing supply. And higher interest rates will make it difficult to finance the development of additional housing supply. 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%. Previously, the Fed 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, I do think the Fed should explicitly acknowledge the role fiscal, trade and regulatory policy is having on the economy and inflation as well. Given today’s projections, we reiterate our policy recommendation with respect to any possibility of a soft landing. Clearly, elevated inflation readings call for a normalization of monetary policy, particularly as the economy moves beyond covid-related impacts. However, fiscal and regulatory must complement monetary policy as part of this adjustment. Yet, many of these measures are simply beyond the Fed’s control. For example, higher inflation in housing is due to a lack of rental and for-sale inventory and cost growth for building materials, lots and labor. Higher interest rates will not produce more lumber. A smaller balance sheet will not increase the production of appliances and materials. In short, while the Fed can cool the demand-side of the economy (reducing inflation and growth), additional output on the supply-side is required in order to tame the growth in costs that we see in housing and other sectors of the economy. And efficient regulatory policy in particular can help achieve this goal and fight inflation. Related ‹ Weakening Builder Confidence Points to Economic Troubles AheadTags: economics, FOMC, home building, housing, inflation, interest rates, single-family

Federal Reserve Accelerates Rate Hikes2022-06-15T14:15:41-05:00

Credit for Builders and Developers Tightens in the First Quarter

2022-05-13T07:21:08-05:00

During the first quarter of 2022, credit became tighter on loans for Acquisition, Development & Construction (AD&C) according to NAHB’s Survey on AD&C Financing.  The NAHB survey produces a net easing index  that summarizes the change in credit conditions, similar to the net easing index constructed from the Federal Reserve’s survey of senior loan officers (SLOOS).  In the first quarter of 2022, both the NAHB and Fed indices were negative, indicating tightening credit conditions.   The NAHB index stood at -2.3 while the Fed index was -4.7, compared to +9.7 and +10.3, respectively, in the fourth quarter of 2021.  This is the first time that both measures show tightening credit conditions since mid-2020. The NAHB net easing index uses information from questions that ask builders and developers if availability of credit has gotten better, worse, or stayed the same since the previous quarter.  In the first quarter of 2022, 6 percent of the NAHB builders said availability of credit for land acquisition had gotten better, while 9 percent said it had gotten worse.  For land development, 3 percent said credit conditions improved, while 14 percent of the respondents indicated that it had gotten worse.  Finally, 11 percent of builders reported that the availability of credit for single-family construction had improved, compared to only 4 percent who said it had gotten worse. One way lenders reduced availability of credit in the first quarter of 2022 was by lowering  Loan-to-Value (LTV) and Loan-to-Cost (LTC) ratios.  In the NAHB survey, the average LTV on all four categories of AD&C loans declined between the fourth quarter of 2021 and the first quarter of 2021: from 70.9 to 64.4 percent on loans for land acquisition, from 72.4 to 67.7 percent on loans for land development, from 76.7 to 74.1 percent on loans for speculative single-family construction, and from 77.4 to 76.0 percent on loans for pre-sold single-family construction. Similarly, the average LTC declined from 67.6 to 66.9 percent on loans for land acquisition, from 75.9 to 74.5 percent on loans for land development, from 86.3 to 85.0 percent on loans for speculative single-family construction, and from 90.0 to 86.7 percent on loans for pre-sold single-family construction. As of the first quarter, rising interest rates  recently reported on other types of loans were not yet consistently evident in the NAHB AD&C survey.   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) decreased from 6.43 in the fourth quarter of 2021 to 6.32 percent in the first quarter of 2022 on loans for land acquisition, but increased from 7.14 to 7.85 percent on loans for land development. For pre-sold single-family construction, the average effective rate decreased from 7.94 to 7.38 percent and from 8.10 to 7.90 percent on loans for speculative single-family construction. Related ‹ Building Materials Prices Move Higher, Up 19% Year-over-YearTags: ad&c lending, ad&c loans, ADC, construciton loans, construction lending, credit conditions, economics, home building, housing, interest rates, lending, loan-to-cost, loan-to-value, LTC, LTV, single-family

Credit for Builders and Developers Tightens in the First Quarter2022-05-13T07:21:08-05:00

Mortgage Activity Up in ARMs

2022-05-11T15:16:06-05:00

By Litic Murali on May 11, 2022 • Per the Mortgage Bankers Association’s (MBA) latest month’s surveys (the week ending May 6), the 30-year fixed-rate mortgage (FRM) rate rapidly grew to 5.53%, marking the steepest interest rate increase on record. The Market Composite Index, a measure of mortgage loan application volume, increased by 2% on a seasonally adjusted basis from one week earlier, despite a general downward trend.  Prospective buyers are showing some resiliency to higher rates, partly due to utilization of adjustable-rate mortgages (ARMs), per the MBA. ARMs typically have lower rates than their fixed-rate counterparts but more volatility following a predetermined period (usually 5 years) after which the rate becomes variable. ARMs’ lower rates also reduce a mortgage’s monthly payment. In the latest week, the percentage of ARM originations, in terms of loan volume, was 10.8%. This figure is nearly double what it was one month ago. On dollar terms, ARM originations made up 19.4% of new mortgage debt. Total mortgage activity has been trending downward, but the last two weeks have shown an uptick in Purchasing, which increased by 0.5% on a seasonally adjusted basis. It still has been exhibiting monthly declines. Refinancing, on the other hand, has continued trending downward through the latest week.  The latest week’s FRM rate was 17 basis points higher than the previous week. The ARM interest rate used above represents that of a “5/1 ARM”, i.e., a 5-year period of a predetermined interest rate followed by a variable rate that changes every year, subject to market conditions. Its weekly changes also trail behind those of the FRM’s interest rate. All figures above are not seasonally adjusted. In the latest week, the average contract interest rate for 5/1 ARMs increased to 4.47 percent from 4.25 percent. On an unadjusted basis, the Purchasing Index showed an 8% year-over-year decline and the Refinancing Index showed a 72% year-over-year decline. Related ‹ Inflation Slows from 40-Year High in AprilTags: 30-year fixed-rate mortgage, adjustable-rate mortgage, home purchases, interest rates, mortgage bankers association, mortgage originations, refinancing

Mortgage Activity Up in ARMs2022-05-11T15:16:06-05:00

Consumer Credit Increases in First Quarter

2022-05-09T13:21:39-05:00

By Litic Murali on May 9, 2022 • In the first quarter of 2022, non-real estate secured consumer credit, per the Federal Reserve’s latest G.19 Consumer Credit report, grew at a seasonal adjusted annual rate of 9.7%, with revolving debt growing at 21.4% and nonrevolving at 6.1%. Total consumer credit currently stands at $4.5 trillion, with $1.1 trillion in revolving debt and $3.4 trillion in non-revolving debt. From the previous quarter, total consumer credit increased by $107 billion, with revolving debt and non-revolving debt increasing by $56 billion and $51 billion, respectively. As the G.19 data are not inflation adjusted, it is reasonable to assume that part of the consumer credit growth, notably revolving debt, owes to recent price levels’ skyrocketing. However, even after adjusting for inflation, American households’ appetite for services increased (in part due to the lifting of COVID restrictions) and for goods was forcibly reduced. On the other hand, nonrevolving debt, which is closed-ended credit, grew moderately and was higher than pre-pandemic levels.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 basis. The most recent memo item indicates that, as of the first quarter of 2021, student loans stood at $1.8 trillion and motor vehicle loans stood at $1.3 trillion. Annualized, the changes in these two categories from the previous quarter are $58.4 billion and $83.6 billion, respectively. Together, these loans’ make up 90% of non-revolving debt (NSA), a share that has held approximately constant historically. Rising production costs resulting from ongoing supply chain issues and high interest rates have together kept car prices and, effectively, auto loan debt elevated. Related ‹ Solid Job Gains in AprilTags: auto loans, consumer credit, COVID-19, credit cards, federal reserve board, g.19, inflation, interest rates, non-revolving debt, student loan debt, supply chains

Consumer Credit Increases in First Quarter2022-05-09T13:21:39-05:00

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