The numbers: Construction of new U.S. homes fell 11.3% in August — falling short of Wall Street expectations — as builders scaled back new projects to focus on completions.
The pace of construction reversed course and fell as mortgage rates stayed over 7%, dampening home-buying demand. The last time construction of new homes was at this level was in June 2020.
So-called housing starts fell to a 1.28 million annual pace from 1.45 million in August, the government said Tuesday. That’s how many houses would be built over an entire year if construction took place at the same rate every month as it did in August.
Economists on Wall Street were expecting a drop in starts to 1.43 million. All numbers are seasonally adjusted.
Housing starts peaked at 1.8 million in April 2022.
The number of homes started in July was revised downwards, to an increase of 2% to 1.45 million, from an initial reading of a 3.9% gain.
New homes have dominated the housing market, but persistently high rates are beginning to spook home builders. In anticipation of waning demand, builders said they’ve started to ramp up price cuts to boost buyer demand in September, according to a survey by the National Association of Home Builders.
Building permits, a sign of future construction, rose 6.9% to a 1.54 million rate. That’s the highest level since October 2022.
Key details: The construction pace of single-family homes fell by 4.3% in August, and apartment-building construction fell by 26.3%.
But home builders ramped up single-family home construction in the South, where starts rose by 8.1% in August.
Housing starts fell the most in the West, by 28.9%.
Permits for single-family homes rose 2% in August, while permits for buildings with at least five units or more surged by 14.8%.
Around 1.69 million homes were under construction as of August.
Big picture: Builders are increasingly concerned about how 7% rates will impact demand, and they’re pulling back on starting new developments as a result.
Builder confidence in September fell to the lowest level in five months, according to the NAHB. Home builders are increasingly offering incentives, including cutting prices. The share of builders cutting prices to boost sales rose to the highest level in nine months, the NAHB noted, going up to 32% in September from 25% the previous month.
Nonetheless, given the long-term need for housing and a decade of underbuilding, builders may not see a sustained drop in demand.
What are they saying? Despite starts falling sharply in August, the uptick in building permits “suggests housing starts could pick up modestly again and today’s data could reflect some volatility,” CIBC Economics said in a note. “Nonetheless, the cooling in building activity is a good sign for the Fed which is expecting to limit housing market activity in an effort to contain inflation.”
Rates have peaked, but “will remain elevated for the rest of the year,” Capital Economics wrote in a note. And this means that with “a slowing economy, we expect this will lead single-family starts to flatten-off at around 900,000 annualised until mid-2024, after which an economic recovery will help spur buyer demand and supporting renewed homebuilder confidence,” they added.
Regional banks that went big lending on office properties also face a ticking time bomb of maturing debt that they helped create, particularly if the Federal Reserve holds its policy rate near the current 22-year high well into next year.
“The area of greatest concerns for banks is office space,” says Tom Collins, senior partner focused on regional banks and credit unions at consulting firm firm West Monroe. Should rates stay high, “borrowers are going to face a tough decision of whether they refinance or default,” he said.
The fight to bring more staff back to half-empty office buildings comes as an estimated $1 trillion wall of commercial real-estate loans is set to mature through 2024. While tenants haven’t shied away from signing up to pay top rents at trophy buildings, the same can’t be said for the rows of lower-rung properties lining financial districts in big cities.
The Fed embarks on a two-day policy meeting on Tuesday, with expectations running high for rates to stay steady, giving more time to study the impact of earlier rate increases.
The central bank’s rate hikes have further complicated matters for landlords, and fresh debt for office buildings no longer looks cheap nor abundant. Regional banks also have been piling back on lending after Silicon Valley Bank and Signature Bank collapsed in March and as deposits fled for yield elsewhere.
Loan volumes from Wall Street similarly have been anemic. This year it has produced slightly more than $10 billion in “conduit,” or multi-borrower, commercial mortgage-backed securities deals through the end of August, the least since 2008, according to Goldman Sachs. Coupons, a proxy for mortgage rates, have climbed above 7%, the highest since the early 2000s.
“I don’t think this is a wash out here,” Collins said of the threat of more regional bank failures, but he does anticipate pain for lenders heavily exposed to lower quality class B and C office buildings in urban areas.
Banks can help mitigate the wall of debt coming due by stepping up the pace of loan modifications to help borrowers keep properties, but Collins said he also anticipates lenders will need to increase loan sales, write downs and mergers or acquisitions.
“There is no doubt there will be private equity and other investors that will be interested in buying some of these loans, taking them off the balance sheets of banks,” Collins said.
“The obvious question there is at what discount?” he said, adding, “I think investors will wait until things get more dire to try to get a better deal.”
Another offset to banks’ office exposure has been the relatively stable performance of hotels, industrial and other property types. But Collins said that if rates stay high and the economy falters, those sectors are likely to face challenges as well.
The 10-year Treasury yield, BX:TMUBMUSD10Y
a benchmark lending rate for the commercial real estate industry, was near 4.32% on Monday, hovering around a 16-year high ahead of the Fed meeting, while the policy-sensitive 2-year Treasury rate BX:TMUBMUSD02Y
was near 5.06%. Stocks SPX
Office distress intensified in August, with the special servicing rate of loans in bond deals hitting 7.72%, compared with a 6.67% rate for all property types, according to Trepp, which tracks the commercial mortgage-backed securities market. A year ago, the rate of problem office loans was 3.18%.
“If I was an investor, I would be patient around this, because values are only going to come down, I would imagine,” Collins said.
U.S. stocks closed lower on Tuesday, with the Nasdaq Composite leading the way down, as Apple’s unveiling of its new iPhone and watch failed to boost appetite for equities. The Dow Jones Industrial Average DJIA, -0.05%
shed about 16 points, or about 0.1%, to end near 34,647, while the S&P 500 index SPX, -0.57%
closed 0.6% lower and the Nasdaq Composite Index COMP, -1.04%
slumped 1%, according to preliminary FactSet data. That was the biggest daily percentage drop in about a week for the Nasdaq. Shares of Apple Inc. AAPL, -1.71%
were a focus Tuesday as it rolled out a lineup of new consumer products, including its iPhone Pro Max, which will now start at $1,199 instead of $1,099, while its Pro model’s price stays the same. Investors also remain focused on the inflation data, including the release on Wednesday of the consumer-price index for August, before the U.S. stock market’s open. Apple shares fell 1.9% on Tuesday. Climbing bond yields can pressure high-growth stocks as borrowing costs rise. The benchmark 10-year Treasury yield TMUBMUSD10Y, 4.297%
edged down 2.4 basis points to 4.263% Tuesday, but was still near its highest level of the year.
Stock investors are showing some hesitancy for Tuesday, with big signals on the economy coming this week via consumer prices and retail sales. Ahead of that, Apple is expected to tempt consumers with yet another new iPhone on Tuesday.
How much should investors be worrying right now? Our call of the day from Pershing Square Capital Management manager Bill Ackman says that in the near term, we can relax a little, but it isn’t all roses.
He told the Julia La Roche Show in an interview where he felt like he had a “crystal ball of what was going to happen,” starting in January 2020 with the COVID-19 outbreak, and that carried on through interest rates and the economy. Indeed, the manager reportedly made nearly $4 billion on a couple of pandemic-related bets.
“I would say the crystal ball has clouded a bit in the last period. I think these are unusual economic times and perhaps we always say that, but I don’t think this is a pattern that has been repeated…or it hasn’t been for more than 100 years,” he said.
But he remains near-term upbeat. “For two years, people have been saying that recession’s around the corner and you know we’ve had a very different view, and continue to have this view that I think people are coming around to, that the economy is actually still quite strong,” he said.
And while those on lower-income rungs have burned through a lot of COVID savings, he thinks the economy has yet to really see impact from the big fiscal stimulus seen in recent years.
Looking down the road though, Ackman has got a stack of concerns over the economy. He sees about a third of federal debt due to get repriced meaning that over a relatively short period of time, “interest expense will become a much bigger part of the deficit that is not going to be a contributor to the economy.”
And while higher interest rates do help savers, ultimately that will be a big drag on the economy, he said, adding that rising inflation, mortgage rates, car payments and credit card rates, are all set to slow the economy.
“We’re still in the midst of a war and there’s political uncertainty you know with an upcoming election,” he said. That partly explains Pershing Square’s hedge via a short position on the 30-year Treasury bond BX:TMUBMUSD30Y
that he laid out in a tweet in early August.
For roughly a year, long-term Treasury yields have been trading below short-dated ones, which is known as an inverted yield curve, a phenomenon that’s often seen as a precursor to recession.
“I don’t see inflation getting back to 2% so quickly, if at all, and if in fact we’re in a world of persistent 3% inflation, you know it doesn’t make sense to have a 4.3%, 4.25% Treasury yield,” he said.
Other risks? Ackman remains worried about regional banks following the spring crisis, as many have big fixed-rate portfolios of assets that have gotten less and less valuable as rates rise. “I would say the commercial real estate picture has not gotten better, if anything, you know, you’re going to start seeing real defaults, particularly with office assets,” he said.
“Regional banks have the most exposure to construction loans so they are going to be a lot of construction loans that won’t be able to repaid. There will be a lot of restructurings, so either the investors groups are gonna have to put in a lot more equity or the banks are going to start taking some losses,” he said.
Ackman says investors also face a presidential campaign that could add some stress. The hedge-fund manager said he’s surprised there have not been “more and better alternative candidates” for the 2024 campaign over President Joe Biden and former President Donald Trump.
He’d like to see JPMorgan Chase & Co. CEO Jamie Dimon toss his hat in the ring and believes Biden is “beatable,” by a strong candidate.
Ackman himself said it’s “possible,” he himself could run someday, but he’s more focused on having a better investment track record over Berkshire Hathaway Chairman and CEO Warren Buffett — and needs some 30 years to match the Oracle of Omaha.
Apple’s AAPL, +0.66% big event kicks off at 1 p.m. Eastern, with the launch of the pricier iPhone 15 expected to be on the agenda.
Hot ticket. Arm Holdings’ IPO is already 10 times oversubscribed and bankers will stop taking orders by Tuesday afternoon, Bloomberg reports, citing sources.
Upbeat results are boosting shares of convenience-store operator Casey’s General Stores CASY, -1.02%.
Packaging giant WestRock WRK, -1.48%
and rival Smurfit Kappa SK3, -8.87%
have announced a stock and cash tie up. WestRock shares are up 8% in premarket.
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The second week of September, as in the NFL, marks a kickoff of sorts for the tech year.
Headlined by Apple Inc.’s AAPL, +0.72%
seminal iPhone event on the second Tuesday of the month at Apple Park, and anchored by Salesforce Inc.’s CRM, +0.33%
wildly popular Dreamforce conference up the road in San Francisco, these several days set a tempo as well as establish a road map for the industry over the next 12 months. They also open the floodgates on tech conference season, with shows stacked up over the next several weeks for Facebook parent Meta Platforms Inc. META, +3.33%,
Microsoft Corp. MSFT, +1.21%,
and Oracle Corp. ORCL, +0.32%.
Oh, and there’s that initial public offering from Arm Holdings Plc, the chip designer owned by SoftBank Group Corp. 9984, +3.86%
that is expected to value Arm at $50 billion to $54.5 billion on a fully diluted basis. Another IPO candidate, delivery startup Instacart, also plans a public offering that would value it at $7.5 billion. Both deals could jump-start what has been a somnolent tech IPO market the past few years.
For that reason alone, this jam-packed tech week might hold even more import, and consequences, than previous years. A confluence of legal tussles, macroeconomic conditions, a trade war with China, and regulatory bluster have raised the stakes.
“It’s a tale of two cities with this week’s events highlighting both the issues and opportunities in tech,” Silicon Valley analyst Maribel Lopez said in an interview, assessing the week. “Arm’s IPO showcases the strength of tech and AI at a time when the AI forum and Google-DoJ shine a light on the concern that a few companies are wielding tremendous power for the future of the world.”
GOOG, +0.47%
Google faces off with the Justice Department in a federal court in Washington, D.C.
Justice Department officials argue that Google illegally leveraged agreements with phone makers such as Apple and Samsung Electronics Co. 005930, +0.71%
and with internet browsers like Mozilla to be the default search engine for their customers, thus preventing smaller rivals from gaining access to that business.
“This is a backwards-looking case at a time of unprecedented innovation, including breakthroughs in AI, new apps and new services, all of which are creating more competition and more options for people than ever before,” Google General Counsel Kent Walker said in a statement.
The following day, Wednesday, Senate Majority Leader Chuck Schumer, D-N.Y., convenes an all-star panel of CEOs from Meta, Microsoft, Google, OpenAI and Palantir Technologies Inc. PLTR, +4.82%.
As lawmakers ruminate on how to harness AI responsibly, bipartisan legislation is in the works. Sens. Richard Blumenthal, D-Conn., and Josh Hawley, R-Mo., are among those crafting a bill.
Even Apple and Salesforce aren’t immune from recent events: Apple has endured a relatively rough patch of disappointing (for them) revenue and iPhone sales while balancing risk/reward with its huge investment in China, and Salesforce CEO Marc Benioff has threatened to relocate Dreamforce to Las Vegas after more than two decades in his hometown of San Francisco if drug use and homelessness disrupt this year’s event.
The most pressing concern, when all is said and done, is AI — which hovers like the Death Star over the tech landscape.
“The biggest concern is the forum is behind closed doors, which could lead to regulatory capture, where dominant players in the industry help influence the regulations being imposed,” Kimberlee Josephson, associate professor of business administration at Lebanon Valley College (Pa.), said in an interview. “It’s almost as if it puts them in the hot while giving them a seat at the table at the same time.”
“At the very least, it sends the signal that something is being done,” she said. “Antitrust cases are so subjective. What constitutes barriers to entry? DoJ adds a level of seriousness.”
Electric-vehicle startup VinFast Auto Ltd. has seen its market capitalization fall more than $140 billion in less than two weeks, weighed down by a six-day losing streak for the company’s stock.
Shares of VinFast VFS, -2.72% soared last month after the company went public through a special-purpose acquisition company deal, taking its market cap to an eye-watering $231.3 billion on Aug. 25 — easily surpassing established automakers such as Ford Motor Co. F, +0.57%
and General Motors Co. GM, +0.09%.
VinFast is on pace to extend its losing streak to seven days. Shares of the low-float company fell 26.3% Thursday, taking VinFast’s market cap to $85 billion, according to FactSet data. Ford’s market cap is $47.7 billion and GM’s is $44.5 billion, FactSet data show.
The EV maker is a majority-owned affiliate of Vietnamese conglomerate Vingroup, one of the largest publicly traded companies in Vietnam. VinFast said that as of June 30, 2023, the company has delivered close to 19,000 EVs.
About 99% of VinFast shares are controlled by Vingroup chair and VinFast founder Pham Nhat Vuon, making only a small portion available to investors.
VinFast is importing its vehicles into the U.S. and is also ramping up its North American presence. In July, the company broke ground on an electric-vehicle manufacturing site within the Triangle Innovation Point in Chatham County, N.C. The startup says the plant will eventually have the capacity to make 150,000 vehicles a year.
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With the threat of inflation back at the forefront for many investors, there’s one large stock-market investor positioning for it to be a decade-long phenomenon. In a note posted to the firm’s website, Chief Investment Officer William Smead of Phoenix-based Smead Capital Management, which oversees $5.83 billion in assets, said “we are loaded with inflation beneficiary stocks like oil and gas stocks and useful real estate.” The firm likes home builder D.R. Horton DHI; Simon Property Group SPG, a real estate investment trust…
Shares of Chinese property developers rose sharply Monday, as more major Chinese cities said over the weekend that they would ease mortgage policies in a bid to shore up the real-estate sector.
The Hang Seng Mainland Properties Index rose 8.2%. Hong Kong-listed Longfor Group Holdings 960, +8.11%
climbed 10% and Seazen Group 1030, +18.30%
jumped 17%. Shanghai-Listed Gemdale 600383, +1.63%
added 4.1% and China Vanke 000002, -0.07%
gained 1.4%.
Major Chinese cities across the country, including Beijing and Shanghai, lowered mortgage requirements for some home buyers late last week, lowering the bar for home purchases.
“This nationwide policy measure marks a significant step in stimulating the property sector, as top policymakers become increasingly worried about the collapse of the property sector, the downward spiral, and a rising number of credit risk events among major developers and financial institutions since mid-August,” Nomura analysts said in a note.
Separately, news reports over the weekend saying that property giant Country Garden Holdings 2007, +14.61%
received creditor approval to extend a bond also lifted the mood and supported the company’s shares. Country Garden shares were last up 9.0% at 0.97 Hong Kong dollars (12 U.S. cents).
Year to date, Country Garden’s stock has slumped 64% after the company posted its worst loss since going public 16 years ago and missed $22.5 million in interest payments on its dollar bonds in August.
Despite Chinese authorities’ supportive policies and Country Garden’s bond extension, some analysts warned that the extension could just be a near-term reprieve.
“With the lack of an eventual resolution [for Country Garden],” headwinds linger for the Chinese property sector, IG Asia analysts said in a note.
“Persistent earnings weakness will no doubt drive the sector’s leverage higher,” said S&P Global Ratings credit ratings analyst Oscar Chung.
S&P believes industry leaders and real-estate companies with a diverse business mix such as rental and service incomes can better withstand declining development margins.
Conceptual image of a city hit by extreme heatwave
getty
Amidst recent news coverage and the European Parliament plenary session titled ‘The Water Crisis in Europe’, it has become evident that the region is confronting a pressing and urgent water problem. Last year’s record-breaking heatwave, which marked Europe’s hottest summer on record and its second warmest year ever, serves as a stark reminder of the escalating climate challenges. As heatwaves and droughts grow more frequent and extreme, the depletion of water reserves has become a matter of mounting concern for policymakers, business leaders, and the European population alike.
The construction industry in Europe can play a crucial role in addressing this pressing issue by implementing water-saving strategies at every stage of development. Water scarcity not only affects human consumption, agriculture, and energy production but it also poses economic and environmental challenges. According to the National Audit Office, the growing risk of drought from climate change will necessitate an additional 4 billion litres of water per day by 2050. By taking proactive measures to reduce water consumption and improve sustainability, the construction industry can contribute significantly to alleviating Europe’s water crisis and pave the way to a greener and more water-secure future.
Rethinking Construction Practices
Water is a fundamental element in the construction process, essential for preparing mortar, mixing cement concrete, and curing work. As construction projects progress through their lifecycle, water is consumed at various stages, making it a significant resource in the industry.
Regrettably, millions of gallons of water are needlessly wasted during construction, mainly due to inadequate safeguards against excessive water use. Recent data has shown that water consumption in Europe has surged, resulting in an annual water loss of over 84 gigatons since 2018. In response to this escalating problem, efforts must be made to reduce water demand by implementing water-saving techniques throughout the construction process. Some approaches include capturing and recycling greywater, investing in water-efficient infrastructure and equipment, and exploring alternative sources of water. By taking these steps, construction sites can significantly minimise water wastage and contribute to more sustainable water usage.
Embracing innovative construction materials and technologies is another essential aspect of rethinking construction practices to address water scarcity. Sustainable building materials that require less water during production and have a lower environmental impact can help conserve water resources. For instance, using eco-friendly concrete mixes that incorporate recycled materials can reduce the overall water footprint of construction projects.
Additionally, adopting green building certifications such as LEED (Leadership in Energy and Environmental Design) or BREEAM (Building Research Establishment Environmental Assessment Method) can guide construction projects towards water-efficient and environmentally conscious practices. These certifications promote the integration of water-saving measures, such as rainwater harvesting systems and water-efficient landscaping, further bolstering efforts to alleviate Europe’s water problem.
Sustainable Post-Construction Strategies
It is equally essential to consider strategies that promote water conservation and efficiency during an asset’s operational phase. By adopting materials and designs that produce less wastewater and incorporating water-saving appliances like low-flow showerheads and efficient washing machines, the industry can further minimise water consumption, contributing to the long-term alleviation of water scarcity.
One of the key components of sustainable post-construction strategies is the implementation of greywater recycling systems. Greywater, which is wastewater from non-toilet fixtures such as sinks and showers, can be treated and reused for non-potable purposes like toilet flushing or landscape irrigation. By harnessing this resource, buildings can significantly reduce their reliance on freshwater sources and minimise the burden on water treatment facilities. Integrating such systems into building designs can foster a more circular and responsible approach to water management.
“Smart” buildings utilise advanced technologies to optimise water use. Smart water meters, leak detection systems, and real-time water monitoring can help identify inefficiencies and enable prompt action to address water wastage. These technologies empower building managers to make informed decisions and ensure that water consumption remains sustainable over the building’s lifecycle.
Government and Public Support
To achieve substantial progress, collaboration between owners, the construction industry, governments, and public bodies is crucial. Governments should introduce policies that incentivise water conservation, promote the use of renewable resources like rainwater harvesting, and invest in research to explore further innovative water-saving solutions. Increased educational initiatives and technical support can also foster a culture of water consciousness, encouraging individuals and businesses to adopt more sustainable water practices.
Government policies play a central role in shaping the direction of the construction industry’s water-saving efforts. By offering financial incentives, tax breaks, or grants to construction projects that prioritise water efficiency and sustainable practices, governments can encourage the widespread adoption of water-saving measures. Setting water efficiency standards and incorporating them into building codes can make water-conscious construction practices the norm, further contributing to water conservation efforts.
A Catalyst for Meaningful Change
Climate change remains a significant challenge across Europe, intensifying the strain on water resources. By embracing water-saving strategies and sustainable practices, the construction industry can be a driving force in mitigating water scarcity for the foreseeable future. It is crucial that all stakeholders collaborate in optimising water resources and adopting eco-friendly methods. While the changes might seem incremental, collective efforts within the construction industry can serve as a catalyst for more profound changes that will contribute to a water-resilient future for Europe.
The U.S. Labor Day holiday will mark another milestone in the marathon to bring workers back to the office, but it won’t be a quick fix for landlords, according to Thomas LaSalvia, head of commercial real estate economics at Moody’s Analytics.
“A lot of companies are saying that after Labor Day, ‘We expect more out of you,” LaSalvia said, referring to days in the office. Still, office attendance, he argues, likely only stages a fuller comeback if a job or promotion is on the line.
That could prove difficult, with Friday’s U.S. jobs report for August expected to show U.S. unemployment at a scant 3.5%, near the lowest levels since the late 1960s, even if hiring has been slowing. The labor market, so far, appears unfazed by the Federal Reserve’s benchmark rate reaching a 22-year high.
It has been a different story for landlords facing a roughly 19% vacancy rate nationally and piles of debt coming due, especially for owners of older Class B and C office buildings with a bleak outlook or properties in cities with wobbling business centers.
As with shopping malls, LaSalvia said it’s largely a problem of oversupply, with many office properties at risk of becoming obsolete as tenants flock to better buildings and locations staging a rebirth. The trend can be traced in leasing data since 2021, with Class A properties in central business districts (blue line) showing a big advantage over less desirable buildings in the heart of cities (orange line).
Return to office isn’t going to save the entire office property market
Moody’s Analytics
“Little by little, we are finding the office isn’t dead,” LaSalvia said, but he also sees more promise in neighborhoods with a new purpose, those catering to hybrid work and communities that bring people together.
Another way to look at the trend is through rents. Manhattan’s Penn Station submarket, with its estimated $13 billion overhaul and neighboring Hudson Yards development, has seen asking rents jump 32% to $74.87 a square foot in the second quarter since the fourth quarter of 2019, according to Moody’s Analytics. That compares with a 2% bump in asking rents in downtown New York City to $61.39 a square foot for the same period.
The push for a return to the office also doesn’t mean a repeat of prepandemic ways. Goldman Sachs analysts estimate that part-time remote work in the U.S. has stabilized around 20%-25%, in a late August report, but that’s still up from 2.6% before the 2020 lockdowns.
Furthermore, the persistence of remote work will likely add another 171 million square feet of vacant U.S. office space through 2029, a period that also will see tenants’ long-term leases expire and many companies opting for less space. The additional vacancies would roughly translate to 57% of Los Angeles roughly 300 million square feet of office space sitting empty.
“The fundamental reason why we had offices in the first place have not completely disintegrated,” LaSalvia said. “But for some of those Class B and C offices, the writing was on the wall before the pandemic.”
U.S. stocks were mixed Thursday, but headed for losses in a tough August for stocks, with the S&P 500 index SPX
off about 1.5% for the month, the Dow Jones Industrial Average DJIA
2.1% lower and the Nasdaq Composite COMP
down 2% in August, according to FactSet.
Salesforce Inc. shares rallied in the extended session Wednesday after the customer-relations management software giant’s earnings outlook topped Wall Street expectations two weeks ahead of its annual confab.
Salesforce CRM shares rallied more than 6% after hours, and held steadily in that range during the conference call with analysts, following a 1.5% rise to close the regular session at $215.04.
China’s property developers are under duress again, re-igniting concerns about a debt crisis. But with a faltering economy and diminished confidence among households and companies, China debt watcher Charlene Chu, senior analyst at Autonomous Research, worries the ingredients are there for a broader financial crisis for the first time.
U.S. mortgage rates increased for the fifth week in a row, with the 30-year reaching the highest level since 2001.
The 30-year fixed-rate mortgage averaged 7.23% as of Aug 24, according to data released by Freddie Mac FMCC, +0.18%
on Thursday.
It’s up 14 basis points from the previous week — one basis point is equal to one hundredth of a percentage point.
The last time rates were this high was in June 2001.
A year ago, the 30-year was averaging at 5.55%.
The average rate on the 15-year mortgage rose to 6.55% from 6.46% last week. The 15-year was at 4.85% a year ago.
Freddie Mac’s weekly report on mortgage rates is based on thousands of applications received from lenders across the country that are submitted to Freddie Mac when a borrower applies for a mortgage.
Separate data by Mortgage News Daily said that the 30-year fixed-rate mortgage was averaging at 7.36% as of Thursday afternoon.
What Freddie Mac said: “Indications of ongoing economic strength will likely continue to keep upward pressure on rates in the short-term,” Sam Khater, chief economist at Freddie Mac, said in a statement.
“As rates remain high and supply of unsold homes woefully low, incoming data shows that existing homes sales continue to fall,” he added. “However, there are slightly more new homes available, and sales of these new homes continue to rise, helping provide modest relief to the unyielding housing inventory predicament.
What are they saying?Other industry experts also believe rates could move higher.
“Earlier this year, it looked as though inflation was being brought under control and the Fed may be almost ready to declare victory… now, however, as inflation has ticked up and bond yields are rising amidst economic uncertainty, it is a different situation,” Lisa Sturtevant, chief economist at Bright MLS, said in a statement. “Instead of talking about rates falling to 6% this year, the question is how much above 7% are we going to go?”
The numbers: Mortgage rates rose for the fourth week in a row to the highest level since 2000, as the economy continues to show strength.
Rates surged as the U.S. economy continued to show signs of resilience, which signal to the market that the U.S. Federal Reserve may not be done with rate increases.
The 30-year was averaging at 7.31%, which in part dampened demand for home-purchase mortgages to the lowest level since April 1995.
Demand for both purchases and refinancing fell. That overall pushed down the market composite index, a measure of mortgage application volume, the Mortgage Bankers Association (M.B.A.) said on Wednesday.
The market index fell 4.2% to 184.8 for the week that ended Aug. 18, relative to a week earlier. A year ago, the index stood at 270.1.
Key details: High mortgage rates are weighing on home buyers’ budgets due to an increase in borrowing costs. Many buyers fled the market as a result of rates rising over the last week. The purchase index, which measures mortgage applications for the purchase of a home, fell 5% from last week.
Rates hold little allure for homeowners hoping to refinance. The refinance index fell 2.8%.
Rates rose across the board.
The average contract rate for the 30-year mortgage for homes sold for $726,200 or less was 7.31% for the week ending August 18. That’s up from 7.16% the week before, the M.B.A. said. The 30-year is at the highest level since December 2000.
The rate for jumbo loans, or the 30-year mortgage for homes sold for over $726,200, was 7.27%, up from 7.11% the previous week.
The average rate for a 30-year mortgage backed by the Federal Housing Administration rose to 7.09% from 6.93%.
The 15-year rose to 6.72%, up from last week’s 6.57%.
The rate for adjustable-rate mortgages rose to 6.5% from last week’s 6.2%. The share of adjustable-rate mortgages rose to 7.6%, the highest level in five months.
The big picture: The housing market continues to be hammered by good economic news, which is pushing rates up and depressing home sales. Higher rates also discourage homeowners from selling, as their purchasing power erodes when they look for homes to buy.
As a result, both home-buying demand and supply of home listings continues to fall, bringing the market to a standstill. Until the economy shows signs of slowing, it’s likely that the housing market will remain in the doldrums.
What the M.B.A. said: “Applications for home purchase mortgages dropped to their lowest level since April 1995, as home buyers withdrew from the market due to the elevated rate environment and the erosion of purchasing power,” Joel Kan, deputy chief economist and vice president at the M.B.A., said in a statement.
Kan added that there was an uptick in people using adjustable-rate mortgages. “Some home buyers are looking to lower their monthly payments by accepting some interest rate risk after the initial fixed period,” he said.
Market reaction: The yield on the 10-year Treasury note BX:TMUBMUSD10Y
was above 4.3% in early morning trading Wednesday.
Heavily-indebted Evergrande, which has symbolized China’s property crisis, made its filing amid growing fears that the sector’s troubles will spread to other parts of the country’s economy.
Since mid-2021, companies accounting for 40% of Chinese home sales have defaulted, stoking fears about the resilience of the world’s second-largest economy.
A Chapter 15 bankruptcy is a way for foreign companies with U.S. assets to get access to domestic courts.
Spillover from Evergrande’s 2021 debt woes rattled investors in stocks and spurred a flight to safety in U.S. government bonds. Investors this week have been closely monitoring developments in China’s property markets.
Stocks were headed for another week of losses on Thursday, with the Dow Jones Industrial Average DJIA
off 2.3% so for the week, the S&P 500 index SPX
2.1% lower and the Nasdaq Composite Index off 2.4%, according to FactSet. Dow YM00, -0.08%
and S&P 500 ES00, -0.15%
futures fell slightly late Thursday.
Chris Low, FHN Financial’s chief economist, said the “mess in China” was resulting in a flight-to-quality bid for 10-year Treasurys, in a Wednesday note to clients. The 10-year yield BX:TMUBMUSD10Y
shot up to 4.307% on Thursday, the highest since November 2007, according to FactSet.
With mortgage rates firmly above 7%, homeownership has become much more expensive. But will rates go even higher?
Three experts told MarketWatch that if the economy continues to show signs of strength, and the U.S. Federal Reserve hikes its benchmark interest rate once again, rates could go up to 8%.
High rates have already taken a toll on the U.S. housing market. Even home builders, who have in recent months experienced strong demand from homebuyers, are reporting a drop in buyer traffic as those rising rates rattle their customers.
But experts also stressed that the U.S. economy is showing early signs of cooling, and that the rate of inflation is easing. That could lead to a slowdown — or even a drop — in mortgage rates. But such forecasts are not a guarantee, as Tuesday’s stronger-than-expected U.S. retail sales figures suggested.
How high can rates go?
Even though the 30-year fixed mortgage rate was averaging 7.26% as of Tuesday evening, the highest level since November 2022, economists say rates could go up further.
The 30-year is “at a critical stage,” Lawrence Yun, chief economist at the National Association of Realtors, told MarketWatch.
“If the 30-year-fixed mortgage rate can hold at a high mark of 7.2% — and the 10-year yield holds at 4.2% — then this would be the high for mortgage rates before retreating,” Yun said. “If it breaks this line and easily goes above 7.2%, then the mortgage rate reaches 8%.”
As of Tuesday afternoon, the 10-year Treasury note BX:TMUBMUSD10Y
was above 4.2%.
“Mortgage rates could rise significantly if global investors demand higher yields for fixed-income assets,” Cris deRitis, deputy chief economist at Moody’s Analytics, told MarketWatch.
Currently, the spread between the 30-year fixed-rate mortgage and a 10-year Treasury bond is around 300 basis points, which is “elevated and highly unusual,” he said.
“‘Historically, the mortgage-rate spread has only been around this level only during periods of financial crisis such as the Great Recession or the early 1980s recession.’”
— Cris deRitis, deputy chief economist at Moody’s Analytics
“Historically, the mortgage-rate spread has only been around this level only during periods of financial crisis such as the Great Recession or the early 1980s recession,” deRitis added. “The historical average is closer to 175 basis points.”
If the 10-year continues to rise — and the U.S. Federal Reserve chooses to interest rates once again — it could go beyond 5%. If the spread stays elevated at 300 basis points, deRitis added, “a mortgage rate of 8% or more is a distinct possibility in the near term.”
Consumers seem to be prepared for 8% rates. In February, households surveyed by the New York Federal Reserve as part of its Survey of Consumer Expectations, found that they expect mortgage rates to rise to 8.4% by the following year, and 8.8% in three years’ time. Yet few saw the moment as an opportunity to buy.
To be clear, rates have been far higher in the past. In 1981, the 30-year mortgage rate went up to 18%, according to Freddie Mac FMCC, +31.97%.
That year, the rate of inflation was 10.3%, according to the Minneapolis Fed.
“So in theory, mortgage rates can go up as much,” Selma Hepp, chief economist at CoreLogic, told MarketWatch. “But I don’t think they’re gonna go much beyond where they are right now.”
If the 30-year mortgage interest rate reached 8%, there would be serious consequences for the housing market, Yun said. “At 8%, the housing market will re-freeze, with fewer buyers and far fewer sellers,” he added.
But don’t expect high rates to hurt home prices just yet, Yun added: “As long as the job market doesn’t turn negative, then home prices will be stable — though home sales will take another step downward. If there is a job-cutting recession, then home prices will fall as some will be forced to sell while there are few buyers.”
Other experts said that high rates have already taken a toll on the U.S. housing sector. “A mortgage rate in excess of 6% has already sidelined a large number of potential homebuyers, especially first-time home buyers,” deRitis said.
He noted that the monthly mortgage payment for a median-priced home at the prevailing 30-year mortgage rate has risen from close to $1,100 per month in January 2019 to over $2,100 today. “At 8%, the monthly payment would rise to over $2,300, excluding an even larger number of potential buyers with above-average incomes,” deRitis added.
High rates also discourage homeowners from selling, since they may have to surrender an ultra-low mortgage with a low monthly payment for a high rate. They may end up with a smaller budget to purchase a home, or worse, not find any listings at all, given an ongoing inventory crunch.
With high rates, many home buyers may be priced out of the market. Yet some buyers — particularly baby boomers — who have the means to put in all-cash offers on homes are keeping home prices elevated, Hepp said.
So who would be able to buy and sell? Cash buyers. “They tend to be older people like baby boomers who own their homes free and clear,” she added. “If they live in more expensive areas, like anywhere in California, they can sell their home and walk away with in excess of $500,000. And that in some markets buys them two homes.”
deRitis said that the ultimate fate of home prices falls on the strength of the job market. Even though rates are high for now, home prices may not fall significantly, as some buyers can still purchase homes with cash, he added.
But “if the labor market should weaken and unemployment rise, home foreclosures would rise,” deRitis added, “placing downward pressure on home prices.”
“So the housing market is definitely suffering from high rates,” Hepp said. “But I think even higher rates would be pretty devastating for the housing market.”
U.S. stocks traded lower for a third straight day on Thursday as rising bond yields spurred weakness in some of the so-called Magnificent Seven megacap stocks, helping to drive the Nasdaq to a six-week low.
How are stocks trading
The S&P 500 SPX
was down 2 points, or 0.1%, to 4,401.
The Dow Jones Industrial Average DJIA
shed 42 points, or 0.1%, to 34,725.
The Nasdaq Composite COMP
fell by 46 points, or 0.3%, to 13,428.
The Dow and S&P 500 were on track to extend a losing streak to a third straight session as major indexes headed for another week in the red. The S&P 500 hasn’t fallen for three weeks in a row since February, FactSet data show.
What’s driving markets
Bonds have resumed command of the stock market of late as higher yields lash shares of megacap technology stocks, undermining their status as the undisputed market leaders.
Long-dated Treasury yields continued to rise Thursday, with the 10-year yield BX:TMUBMUSD10Y
touching its highest level since the 2008 financial crisis, rising north of 4.31%. Bond yields move inversely to prices.
Rising yields helped heap more pressure on shares of some of this year’s highflying tech stocks, including Tesla Inc. TSLA, -0.34%,
Apple Inc. AAPL, -0.91%
and Microsoft Corp. MSFT, -0.01%
The elite group of megacap tech stocks which also includes Amazon.com Inc., Meta Platforms Corp. META, -0.24%
and Alphabet Inc.’s Class A GOOGL, +2.42%
and Class C GOOG, +2.48%
shares has been credited with driving much of the Nasdaq Composite’s nearly 30% run-up year-to-date. But their market dominance has faded in recent weeks as investors have favored other cyclical sectors like energy and materials stocks. Those two sectors were the best performers on the S&P 500 on Thursday.
“That’s a theme that’s been bubbling up here over the last three to four weeks, but there’s more of an exclamation point on it now,” said David Keller, chief market strategist at Stockcharts.com, during a phone interview with MarketWatch.
“First you had Microsoft and Apple breaking down a few weeks ago, now you’re getting Meta breaking below its 50-day moving average.”
Keller added that rising bond yields tend to have a bigger impact on growth stocks like technology names, while sectors like energy are more resilient.
“Energy can do just fine in a rising rate environment. energy and materials should probably do better in a relative basis,” he said.
Minutes from the Federal Reserve’s July meeting released Wednesday afternoon were being blamed for the latest leg higher in global bond yields. They showed that Fed policy makers could continue raising interest rates amid concerns that inflation could reaccelerate, potentially pushing bond yields even higher.
“It’s really uncertain where terminal interest rates will land given the economy isn’t giving us a decisive picture of being too strong or too weak. It’s keeping the window open for more rate hikes potentially,” said Mohannad Aama, a portfolio manager at Beam Capital Management, during a phone interview with MarketWatch.
Shares of Cisco rose 2.6%, while Walmart shares turned lower, down 1.2%.
Economic updates released Thursday helped support the notion that the U.S. economy is growing at a faster pace than economists had expected, potentially complicating the Fed’s efforts to tamp down inflation.
Chesapeake Energy Corp. CHK, +6.03% will replaceMercury Systems Inc. MRCY, +2.99%
on the S&P MidCap 400, S&P Dow Jones Indices said on Wednesday. Shares of Chesapeake were up 6%.
Shares of Cigna Group CI, -7.10%
and CVS Health CVS, -8.89%
dropped following a report that a major nonprofit health insurer was preparing to shun the pharmacy-benefit industry.
Many factors are influencing the remodeling decisions, which are different based on the age of the … [+] homeowner.
National Association of Realtors
The costs to purchase a new home right now continue to escalate, putting it out of reach for much of the population, driving more households to stay in place and do what they can to maintain, repurpose and reimagine their homes.
Many of the households currently on 15- and 30-year mortgage payment plans are at rates below 5%. Now, mortgage rates have skyrocketed to their highest levels in about 15 years. So, at the new rates, a home buyer would add more than $40,000 to the life of the loan on an average home purchase. With that said, it’s no wonder that a recent Zillow report noted that homeowners with mortgage rates below 5% are nearly twice as likely to want to stay put in their current home.
While economic factors aren’t the only reasons people stay in place, it is the leading driver today, which is also triggering investments in home improvement projects.
Commitments to home improvement projects also could be easier today because homes are appreciating at the fastest rates ever. The average annual appreciation typically sits around 4%, but recently homeowners experienced an average of 17%, giving them plenty of equity to tap into to finance projects.
“Pent-up demand and macroeconomic conditions, such as aging housing stock and high mortgage rates, which continue to drive home improvement activity, are instilling a sense of optimism among builders, remodelers, architects and interior designers as they look ahead to the second half of the year,” said Marine Sargsyan, Houzz staff economist.
With these drivers motivating more home improvement projects, let’s take a look at some details around who is doing what, when, where and why.
A Different Era of Remodeling
Over the years, remodeling projects have evolved. Today, they take on many new variations.
First, we are coming out of a pandemic. Homeowners are emerging from lock down, and they face new work situations. Companies across the country are shutting down offices, pushing people back into their homes for the daily office grind. So, homeowners are looking at ways to renovate to create quiet, calm, technology-enhanced spaces to work.
Second, the pandemic also drove households to think about their home can impact their health. So, remodeling projects centered around health and wellness, including indoor air quality, are becoming more frequent. Research from Chrissi Antonopoulos, a senior energy analyst at Pacific Northwest National Labs, shows that many of the motivators for home improvement projects are quality of life based.
Third, the housing stock is aging. Today’s Homeowner reports that the median age of a home in the U.S. is 39 years old, with 50% of homes being built before 1980. So, a larger percent of projects are tied into the ongoing maintenance and upkeep of homes.
Houzz data goes into additional detail on the projects that are related to the aging housing stock, with close to 30% of homeowners choosing to upgrade plumbing in 2022, with electrical and home automation improvement projects close behind.
Finally, the government is offering incentives that are motivating owners to consider clean energy retrofits. Harvard’s Improving America’s Housing Report shows that 34% of home improvement spending goes to energy-related projects, which has remained steady during the last decade. There is a strong correlation between the aging of a home and the investment in energy efficiency projects, which increases substantially when the house is more than 20 years old.
Investments in home remodeling projects focused on maintenance increases after a house is 20 years … [+] old.
Harvard Joint Center for Housing Studies
These incentives provided by the Inflation Reduction Act are new and just being communicated to homeowners at a state level, so could inspire much more remodeling activity during the coming months.
Regardless of the incentive, the study also shows that 93% of homeowners felt they had a better quality of life after finishing their renovations, which as Antonopoulos pointed out, is a major incentive.
Homeowners Age In and Out of Remodeling
Why would the homeowner’s age matter in these home improvement activities? In general, older homeowners have more disposable income to finance projects and to hire labor to do the project. On the flip side, they also have the experience and knowledge to tackle projects on their own. Plus, they most likely have been living somewhere longer, so they have built up more equity in their home, which can also be a financing mechanism.
“We know older generations who have been in their homes longer have, on average, more equity to tap into to do more expensive jobs which typically involves a contractor,” said Dave King, the executive director of the Home Improvement Research Institute (HIRI). “Additionally, there is some evidence to suggest that younger generations simply aren’t as interested in the trades and haven’t learned the same DIY skills as their older counterparts. and are therefore less likely to do DIY as a percentage of total projects done.”
However, many younger buyers aren’t going to be priced out. To find affordable housing, many have to take on fixer uppers, and they may just simply have the energy to make it work. Data provided by HIRI show that younger generations are more likely to purchase a home that needs improvement.
Younger home buyers are more likely to purchase a home that needs to work, both for affordability … [+] and also to make it their own.
Home Improvement Research Institute
“There has also been some work in the last few years from HIRI that suggests Millennials are more likely to do a hybrid with contractors,” King said. “Gen Y will do some of the work themselves, then have a pro come in for certain aspects.”
The National Assocation of Realtors reports that 12% of recent buyers who are older Millennials purchased a previously owned home because they wanted a DIY fixer upper.
The group’s deputy chief economist and vice president of research, Dr. Jessica Lautz, adds that a considerable share of younger buyers may have compromised on the condition knowing they would need to later remodel, but did what they could to enter the housing market today.
The Social Media Impact
Younger generations also grew up watching every style, size and shape of renovation show on TV, and now watch social media influencers talk about renovations online. When I did a quick search for influencers focused on remodeling, I got lists of hundreds, and the most popular have more than a million followers.
This content and the influencers behind it are creating streams of content that are easy to access and can make anyone catch the DIY bug. The HIRI data shows that younger populations are much more likely to consider themselves “heavy DIYers.” Maybe that is because there is a Youtube video that can walk them through nearly any project that they want to take on.
Younger home owners consider themselves to be more DIY than oder generations.
Home Improvement Research Institute
It appears that younger generations are doing more projects that fit in the discretionary space such as needing more space in their home compared to older generations who are more likely to simply be doing maintenance, which again could be because of the longevity in the home.
Older generations are more focused on repair and maintenance home improvements versus optional … [+] updates.
Home Improvement Research Institute
From the Harvard Joint Center for Housing Studies Remodeling Futures Group recent Improving America’s Housing report we see similar data. It shows that younger owners continue to be the most likely to do DIY projects and are somewhat less likely to do pro projects. But, maybe that is not always the case.
“That said, we have seen the DIY share of improvement spending trend downward over the last several decades for the youngest owners under age 35, which we’ve also speculated is because younger owners today are not as skilled at DIY projects as prior generations or as interested in spending their time on these activities,” said Abbe Will, senior research associate and associate project director with the Remodeling Futures group. “And with the aging of the housing stock, younger owners today are also buying into homes that are more likely to need upgrades requiring skilled installation like roofing and electrical/plumbing systems and equipment.”
Data from Today’s Homeowner supports this, showing that older homeowners only spend 15% of their home improvement budgets on DIY projects.
Houzz reports show an increase in households of every generation hiring pros to do the work, up 2 percentage points to more than 9 in 10 renovation projects in 2022.The same report points to Gen Xers and Seniors relying the most on pros at 46% each.
Another demographic differentiator was marriage. The Today’s Homeowner reports show that married couples with children spent more on remodeling projects than single people.
Bringing Meaningful Value
With every homeowner chasing their dream home, there are lots of opportunities for renovations. As homeowners spend more time at home, they need a space that can deliver intangible value, be safe, healthy, comfortable and secure. Anotopoulous says that means talking to them about health and wellness, not about money savings.
“In residential there are no shareholders, so they don’t renovate homes because they want to make money,” she said. “They are concerned about indoor air quality, or health. The motivations that the U.S. Department of Energy traditionally use are not the things that drive uptick in the residential market.”
Her research on the spectrum of home improvement motivators shows that even though people often say they are committing to a renovation for financial reasons, they most often are not. Her advice is to stay away from a focus on lowering utility bills and talk about thermal comfort instead, like most HVAC companies that sell comfort. So, there are other motivators that we have to acknowledge even if the pros, and the homeowner themselves, don’t fully understand.
The Future
The market remains healthy. Today’s Homeowner predicts that home improvement sales will reach more than $620 billion in 2025.
With current economic factors, there will continue to be discretionary spending financed by home equity and homeowners wanting to get the most pleasure out of where they are stuck in place.
And, once they are invested, they want to stay put for a while. The 2023 Houzz and Home Study reports that more than 60% of homeowners plan to stay in their home for 11 years or more following a planned renovation in 2022. Plus, only 6% of today’s homeowners doing renovations plan to sell their home, which is half of where it was in 2018 at 12%.
With more homeowners staying in place, not a lot of new housing coming online, it looks like a healthy road ahead for remodeling.
Plus, 69% of homeowners feel a major sense of accomplishment after they’ve completed their project, but who wouldn’t enjoy a healthier, safer, more resilient home?
