My recent meetings at the NAHB Association Management Conference gave me the opportunity to meet with our National Leadership both Volunteer and staff. Our NAHB staff has had some changes at the top executive spot with Jim Tobin being hired as the new EO. Jim has set forth some aggressive plans to make NAHB a better organization, more “user” friendly as he put it. Recent years have shown that change was needed, especially under the current economic conditions.
NAHB will concentrate on getting the Biden administration’s attention on issues like lumber, interest rates, government over regulations, and more. Simply put NAHB must be aggressively active in the things that Washington doesn’t seem to understand for the industry.
During the AMC I also had the opportunity to visit with Dr. Rob Zeitz, Chief Economist for NAHB. His take on what was coming was sobering but not alarming. He is of the opinion that the Fed will raise the interest rate one more time, to around 25 basis points, or a quarter of a point. That would put the Feds rates at or near 7.75%. He is optimistic that no such increases will happen in 2024, primarily due to the national election and the heat the Administration is facing on many fronts. Translating that to our local situation is a bit trickier but the sentiment is pretty much the same. El Paso is in an economic bubble of sorts, not always falling or rising like the two coasts or Midwest.
Some concerns are being brought up that available land inside the city limits is causing builders to continue building in communities like Socorro, Horizon, Canutillo, and Sunland Park, while El Paso proper isn’t growing. Elections for mayor along with the selection of a new permanent city manager, police chief, and other department heads will cloud the discussion on getting the PSB to sell some land inside the city limits. Small builders need help finding lots and I believe we will face another affordability crisis if we don’t have action on that soon. We will continue to push city hall to get the developers the land so they can get it to our builders. We desperately need workforce housing.
Economic & Policy Blog
Elliot Eisenberg, Ph.D. is a nationally acclaimed economist and public speaker specializing in making economics fun, relevant and educational.
High rates have pushed up the average interest and principal payment for new borrowers using a 30-year mortgage to $2,306. Similarly, two years ago 5% of new borrowers had a payment over $3,000/month, today it’s almost 25%. Moreover, high rates have depressed the dollar volume of cash-out refi activity by about half from 22Q1 when it was almost 1% of available equity/quarter to 0.4%/quarter, a decline of $40 billion/quarter.
While gasoline prices have increased somewhat since May as the price of WTI crude has risen by 13%, diesel prices are up over 40% over the same period. It’s because in May Saudi Arabia, Russia, and others in OPEC+ surprised markets with production cuts, and their heavy sour crude, which is usually cheaper than lighter sweet crude but is now more expensive, is best suited to making diesel.
The Friday File: During 1H23, AMC Theaters grossed $2.3 billion. Ticket sales generated $1.3 billion, other categories including advertising, auditorium rental, arcade games, etc. generated $200 million, and food and beverage spawned $817 million. Amazingly, food and beverage costs were $153 million, that’s a gross profit margin of 82% and a 434% markup. By contrast, film exhibition costs were $629 million generating a mere 52% margin, and a 106% markup.
Since 2020, the employed foreign-born population of the U.S. has increased by 9.9%. It took until 21Q4 for this population to return to where it was pre-Covid. As for the native-born population, it is now 0.7% higher than it was pre-Covid, and it took until 22Q3 before it fully returned to its pre-Covid level. Immigration is critical to labor force growth.
Student loans began accruing interest on 9/1/23 and loan payments are due starting 10/1/23, clipping GDP by one-fifth of a point. Additionally, the odds of a 10/1/23 government closure are rising, and that would knock off an astounding one-fifth of point of GDP/week. Lastly, it’s increasingly likely that the UAW will simultaneously strike Ford, G.M., and Stellantis on 9/15/23 with an immediate GDP hit of $500 million/day. A collective calamity.
August payrolls grew by 187,000, and June and July were revised sharply down and now show growth of 105,000 and 157,000, respectively, the first three-month sub-200,000 stretch since mid-2019. The unemployment rate rose from 3.5% to 3.8%, and wage growth slid from 4.4%/year to a still too high 4.3%/year. So far OK, but these declines aren’t occurring in a vacuum and the impact of tighter monetary policy is just beginning.
The Friday File: In 2000, avocado imports to the U.S. totaled 170 million pounds and avocado consumption was 2 pounds/person. By 2021, imports totaled 2.5 billion pounds, an increase of roughly 1,400%, as consumption rose to 8 pounds/person. With domestic avocado production and acreage steadily declining since 2011, 90% of avocados currently consumed in the U.S. come from Mexico and those imports are worth $3.1 billion/year.
The suggestion that massive increased issuance of Treasuries is what explains the recent increase in bond yields is unfounded as since 1980 the correlation between changes in debt supply and Treasury yields is zero. The rise is probably due to rising yields in Japan due to action taken by the Bank of Japan, tougher talk from the Fed, and rising “no recession” sentiment.
What I learned about credit and lending
By Ray Adauto
I had the opportunity to join two hundred and fifty other NAHB local and state associations at the Association Management Conference in Cincinnati in late August. The fast-paced event brought together a diverse group of association officers and staff to learn things to make running an association better for them and more importantly better for the members.
During this conference, put on by the NAHB, attendees are able to attend breakout sessions on a variety of topics, some recognizable and others that just might be interesting. We also held a session with the Executive team from NAHB, volunteer leaders as well as staff. This was our first meeting with newly appointed National E O Jim Tobin who has been on the job less than 90 days. He comes from inside NAHB so his transition should be smooth. We also had the chance to hear and visit with Dr. Robert Dietz, Chief economist for the NAHB.
Here's where I was most interested in getting a chance to look at his crystal ball to help us navigate the upcoming economic forecasts for housing. The good doctor offered some assurances that while in the short term the Fed has cooled off the economy by raising interest rates there are signs that the Fed may end the interest increases soon. There are some concerns, especially in the AD and C credit markets. These are how builders and developers finance acquisition, development, and construction loans. The contract interest rate was higher in 2023 Q2 than it had been at any time since NAHB began collecting the data in 2018. The rates have been climbing steadily every quarter since the start of 2022 with one minor exception (for land acquisition loans in the third quarter of 2022) (reported on NAHB.org)
This is troubling, and could challenge the housing shortage we have, and frankly shows that the Fed under the current administration is intentionally targeting new home construction while saying the opposite. If AD and C credit is tightened more the ability to meet housing requirements will be stymied. Credit is critical for housing, and while consumer credit is most talked about the reality is that AD and C is even more critical. NAHB is at the forefront of fighting for making AD and C credit available but affordable.
Market Watch: Time for a FED Pause
Eye on the Economy
NAHB Chief Economist Robert Dietz recently provided the following economic and housing industry overview in his bi-weekly newsletter Eye on the Economy.
During the month of August, long-term interest rates increased quickly, with the 10-year Treasury rate rising from 4% to 4.35%. This move was generated by an increasing supply of bonds, ongoing reductions of Fed holdings of Treasuries and mortgage-backed securities (quantitative tightening), renewed hawkish commentary from Federal Reserve officials, and a slight uptick for the CPI measure of inflation.
The result was an increase on rates for both builder loans and mortgages, with Freddie Mac reporting an average rate of 7.23% for the 30-year mortgage, the highest level since 2001. The recent gain proved wrong an earlier NAHB forecast that rates for this monetary policy cycle would peak back in the fall of 2022.
However, interest rates have moved lower since late August as additional data points indicate cooling consistent with some disinflation. The 10-year Treasury rate moved below 4.2% as labor market data indicated declines for the total number of job openings for the U.S. economy (falling below 9 million in July) and the construction sector (363,000 in July).
These estimates align with a slowing economy brought on by tighter monetary policy. This data should convince Fed hawks that now is the time to pause and let current restrictive monetary policy finish the job. The Fed should want to avoid tightening too much, which is now the greater risk.
Prior to the move in August, higher interest rates were having a slowing effect on the housing market. Total existing home sales fell 2.2% to a seasonally adjusted annual rate of 4.07 million in July per the National Association of Realtors. On a year-over-year basis, sales are 16.6% lower than a year ago. In part, this decline is because of a lack of inventory (just a 3.2-month supply) resulting from the mortgage rate lock-in effect. The vast majority of home owners with a mortgage have an existing note of less than 5% and would prefer to hold such a low rate.
Despite a multi-decade low for housing affordability, the lack of existing inventory is spurring more demand for new construction. Sales of newly built, single-family homes in July increased 4.4% to a 714,000 seasonally adjusted annual rate. The pace of new home sales in July was up 31.5% from a year ago. In terms of overall inventory, new construction is now 31% of the market, compared to 10% to 15% historically.
Builders have helped attract sales via mortgage buy-downs and other sales incentives, but also via product shifts. For example, new home size continues to fall, reaching a decade low (2,415 square feet) in the second quarter. Consequently, median prices for new single-family homes are down almost 9% from a year ago to just under $437,000. Declining demand for larger houses also reduced custom home building starts in the second quarter, which were down 8% year over year to 189,000 total homes over the past year.
Eventually, the Fed will ease rates. Just about 90% of consumer inflation in July was because of rising shelter costs, and real-time measures of rent show a slowdown. As inflation moves lower (even if it is still above the Fed’s 2% target), the necessary inflation-adjusted restrictive interest rate required to reduce inflation will decrease, allowing the Fed to cut the federal funds rate. This will likely occur no later than mid-year 2024.
In the meantime, elevated rates for financing for AD&C loans mean that lot supply will be too low as a housing market recovery builds momentum in 2024.