Week in Review: Some positive news on housing

Last week had some positive news for housing, with new home sales and pending home sales turning positive. We are coming from a pretty depressed place so it is a little early to bust out the champagne but improvement is happening, despite what seems like a non-stop slew of layoffs in the mortgage business.

New Home Sales rose 2.5% month-over-month to a seasonally adjusted annual pace of 616,000. This is still down 26% from a year ago. 600,000 looks to be about the average going back to the early 1960s, although the population has increased 86% since then. The US continues to under-build, and the National Association of Realtors thinks there is an underbuilding gap of 5.5 - 6.8 million units.

Pending Home Sales rose 2.5% month-over-month in December. The West and the South had the most activity, with the Northeast and the Midwest having the least. The Midwest and the Northeast really missed out on the big run-up in prices after the real estate market bottomed out. MSAs like Miami, Charlotte and Nashville have seen huge gains over the past several years.

Goldman Sachs put out a piece saying we could see 25% declines in some markets like Austin, Phoenix, San Jose and San Diego. Phoenix and Austin saw 40%+ home price appreciation over the past two years, so these would still be above pre-pandemic levels. San Diego is up about 33% and San Jose is up 18%. Will this cause some stress in these markets? Certainly 25% is the typical equity in a non-QM mortgage so you could see some strategic defaults. I suspect FHA loans in Phoenix could be tough, especially if the borrower only put down the minimum 2.5%.

Goldman sees the 10 year bond peaking in yield in the third quarter of 2023 and they see the 30 year fixed rate mortgage ending 2023 at 6.5%. That forecast seems to imply that MBS spreads remain unusually wide for another year which is unlikely, at least if you look at historic spreads. The spikes are generally sharp and short.

I get asked a lot if this could be another housing bubble. IMO the term “bubble” gets thrown out way too loosely. Bubbles are psychological phenomena where everybody (buyers, investors, bankers, government regulators) believe an asset is “special” and can only go up in price. The memories of 2008 are still too fresh in people’s minds. The other difference between 2008 and today is that the vast majority of home loans are government-guaranteed. The mortgages are generally money good, so there won’t be the cascading crisis of defaults and counterparty risk.

Personal incomes rose 0.2% in December, continuing its downtrend. Spending fell 0.2%. We also got some positive news on inflation with the personal consumption expenditures price index rising 0.2% on a headline basis and 0.3% on the core, continuing its downtrend. The annual pace of inflation keeps declining.

The Fed should like this report. Declining demand will cool the economy and slower wage appreciation will ease the Fed’s fears of a too-tight labor market. The core PCE price index did tick up on a month-over-month basis but the annual rate is falling, and housing should continue to fade into the background as a driver of inflation.

We also got inflationary expectations from the University of Michigan, which showed another decline in inflationary expectations, from 4.4% to 3.9%. This is the lowest since April of 2021, however it is well above the 2.3% - 3.0% pre-pandemic range. The long-term inflationary expectations were stuck at 2.9%, which is about where it has been for the past year and a half. Pre-pandemic, longer-term inflationary expectations were 2.2% - 2.6%. Overall, the Fed should be happy with the latest economic data - it shows they are gaining traction on inflation without killing the economy.

Remember chip shortages? Guess that isn’t an issue anymore. Someone described Intel’s earnings as a “crime scene” with a 32% decline in revenues and a collapse in gross margin from 53.6% to 39.2%. Guidance was awful as well, with the company forecasting a 40% drop in revenue and a further decline in gross margin to 34% and a net loss for the quarter. The stock was hammered, falling 10% at one point before closing down 6%. This quarter speaks to the overall sickness in the PC market and probably corporate IT spending.

The battle between bosses and workers over work-from-home continues and it looks like the workers have the upper hand. Manhattan Office REIT S.L. Green reported a decline in occupancy, the fourth in a row since Q422. Occupancy was around 94.3% pre-pandemic, and it has continued to tick down as time has worn on. In the latest quarter, occupancy fell to 90.9% the lowest since the pandemic began.

S.L. Green is New York City, so it has outsized exposure to the financial sector as well as advertising and media. The financial sector continues to struggle with low underwriting volumes and declining stock and bond markets. We are seeing companies leave New York City due to high taxes and prices, which is exacerbating the problem. Commercial Real estate in New York City is down something like $9 billion in value which is creating budgetary issues. It may turn out that work-from-home will have a huge unintended consequence on the budgets of expensive cities and states.