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Wednesday, May 24, 2023

AIA: Architecture Billings Decreased in April

by Calculated Risk on 5/24/2023 12:38:00 PM

Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From the AIA: AIA/Deltek Architecture Billings Index Reflects Continued Weakness in Business Conditions in April

Architecture firms reported a modest decrease in April billings. However, there was a slight increase in inquiries into future project activity according to a report released today from The American Institute of Architects (AIA).

The billings score for March decreased from 50.4 in March to 48.5 in April (any score below 50 indicates a decrease in firm billings). However, firms reported that inquiries into new projects accelerated slightly to 53.9, while most firms continued to report a decline in the value of new design contracts, with a score of 49.8.

“The ongoing weakness in design activity at architecture firms reflects clients’ concerns regarding the economic outlook,” said AIA Chief Economist Kermit Baker Hon. AIA, Ph.D. “High construction costs, extended project schedules, elevated interest rates, and growing difficulty in obtaining financing are all weighing on the construction market.”
• Regional averages: Midwest (51.2); West (49.3); South (48.7); Northeast (47.2)

• Sector index breakdown: mixed practice (firms that do not have at least half of their billings in any one other category) (52.1); commercial/industrial (51.8); institutional (50.6); multi-family residential (41.5)
emphasis added
AIA Architecture Billing Index Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 48.5 in April, down from 50.4 in March. Anything below 50 indicates a decrease in demand for architects' services.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

This index has declined in 6 of the last 7 months.   This index usually leads CRE investment by 9 to 12 months, so this index suggests a slowdown in CRE investment later in 2023 and into 2024.

Note that multi-family billing turned down in July 2022 and has been negative for TEN consecutive months.   At 41.5, this was the weakest reading for multi-family since the start of the pandemic in March and April 2020.  This suggests we will see a downturn in multi-family starts this year.

Two Key Housing Themes: Low Inventory and Few Distressed Sales

by Calculated Risk on 5/24/2023 09:43:00 AM

Today, in the Calculated Risk Real Estate Newsletter: Two Key Housing Themes: Low Inventory and Few Distressed Sales

Brief excerpt:

Every housing cycle is different. One of the key themes in this cycle is that existing home inventory is historically extremely low as many homeowners are “locked in” to their current home with low mortgage rates.

Another key theme is that there will be few distressed sales as most homeowners have substantial equity.

Here is some data on outstanding mortgage rates and current loan-to-values.

Percent First Lien Mortgage by Interest RateHere is some data from the FHFA’s National Mortgage Database showing the distribution of interest rates on closed-end, fixed-rate 1-4 family mortgages outstanding at the end of each quarter since Q1 2013 through Q4 2022.

This shows the recent surge in the percent of loans under 3%, and also under 4%, starting in early 2020 as mortgage rates declined sharply during the pandemic. The percent of outstanding loans under 4% peaked in Q1 2022 at 65.4%, and the percent under 5% peaked at 85.8%. These low existing mortgage rates makes it difficult for homeowners to sell their homes and buy a new home since their monthly payments would increase sharply. This is a key reason existing home inventory levels are very low.
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MBA: Mortgage Applications Decreased in Weekly Survey

by Calculated Risk on 5/24/2023 07:00:00 AM

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

Mortgage applications decreased 4.6 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 19, 2023.

The Market Composite Index, a measure of mortgage loan application volume, decreased 4.6 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 5 percent compared with the previous week. The Refinance Index decreased 5 percent from the previous week and was 44 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. The unadjusted Purchase Index decreased 5 percent compared with the previous week and was 30 percent lower than the same week one year ago.

“Mortgage applications declined almost five percent last week as borrowers remained sensitive to higher rates. The 30-year fixed rate increased to 6.69 percent, the highest level since March,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. Since rates have been so volatile and for-sale inventory still scarce, we have yet to see sustained growth in purchase applications. Refinance activity remains limited, with the refinance index falling to its lowest level in two months and more than 40 percent below last year’s pace.”

Added Kan, “Investors remained attuned to the uncertainty around the U.S. debt ceiling and communication from several Federal Reserve officials last week, which sent Treasury yields higher, along with mortgage rates. Economic data released over the past week have also pointed to a still-resilient economy. The housing market received positive data on new residential construction – which is seen as a key solution to the lack of housing inventory.”
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 6.69 percent from 6.57 percent, with points increasing to 0.66 from 0.61 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added
Mortgage Purchase IndexClick on graph for larger image.

The first graph shows the MBA mortgage purchase index.

According to the MBA, purchase activity is down 30% year-over-year unadjusted.  

Red is a four-week average (blue is weekly).

Mortgage Refinance Index
The second graph shows the refinance index since 1990.

With higher mortgage rates, the refinance index declined sharply in 2022 - and has mostly flat lined at a low level since then.

Tuesday, May 23, 2023

Wednesday: FOMC Minutes

by Calculated Risk on 5/23/2023 09:09:00 PM

Mortgage RatesNote: Mortgage rates are from and are for top tier scenarios.

• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• During the day: The AIA's Architecture Billings Index for April (a leading indicator for commercial real estate).

• At 2:00 PM: FOMC Minutes, Minutes Meeting of May 2-3, 2023

"Mortgage Rates Move Back Above 7%"

by Calculated Risk on 5/23/2023 05:18:00 PM

From Matthew Graham at MortgageNewsDaily: Mortgage Rates Move Back Above 7%

Today's headline is the most dramatic part of today's story on mortgage rates. The average top tier 30yr fixed rate has been mostly operating in a 6-7% range since September 2022. There were several weeks in the low to mid 7s in Oct/Nov and a few days in early March.
Rates were already quite close to 7% yesterday and today merely provided a gentle nudge. Interestingly enough, the underlying bond market currently suggests lenders would be able to drop back below 7% tomorrow, but only if current trading levels hold until then (they almost never do).
Mortgage Rates Click on graph for larger image.

This is a graph from Mortgage News Daily (MND) showing 30-year fixed rates from three sources (MND, MBA, Freddie Mac) over the last 5 years.  

The 30-year fixed rate for top tier scenarios was 7.01% today, up from the recent low of 6.18% on April 6th.

The cycle high was 7.37% for this series in October 2022.

Go to MND and you can adjust the graph for different time periods.

New Home Sales at 683,000 Annual Rate in April; Median New Home Price is Down 15.3% from the Peak

by Calculated Risk on 5/23/2023 10:57:00 AM

Today, in the Calculated Risk Real Estate Newsletter: New Home Sales at 683,000 Annual Rate in April

Brief excerpt:

The next graph shows new home sales for 2022 and 2023 by month (Seasonally Adjusted Annual Rate). Sales in April 2023 were up 11.8% from April 2022.

Active InventoryAs expected, new home sales were up year-over-year.
As previously discussed, the Census Bureau overestimates sales, and underestimates inventory when cancellation rates are rising, see: New Home Sales and Cancellations: Net vs Gross Sales. This has reversed now since cancellation rates have started to decline. When a previously cancelled home is resold, the home builder counts it as a sale, but the Census Bureau does not (since it was already counted).

There are still a large number of homes under construction, and this suggests we might see a further increase in completed inventory over the next several months, but in general, this is a positive report for new home sales.
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New Home Sales at 683,000 Annual Rate in April

by Calculated Risk on 5/23/2023 10:06:00 AM

The Census Bureau reports New Home Sales in April were at a seasonally adjusted annual rate (SAAR) of 683 thousand.

The previous three months were revised down, combined.

Sales of new single‐family houses in April 2023 were at a seasonally adjusted annual rate of 683,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.1 percent above the revised March rate of 656,000 and is 11.8 percent above the April 2022 estimate of 611,000.
emphasis added
New Home SalesClick on graph for larger image.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

New home sales are close to pre-pandemic levels.

The second graph shows New Home Months of Supply.

New Home Sales, Months of SupplyThe months of supply decreased in April to 7.6 months from 7.9 months in March.

The all-time record high was 12.2 months of supply in January 2009. The all-time record low was 3.3 months in August 2020.

This is well above the top of the normal range (about 4 to 6 months of supply is normal).
"The seasonally‐adjusted estimate of new houses for sale at the end of April was 433,000. This represents a supply of 7.6 months at the current sales rate."
Sales were above expectations of 660 thousand SAAR, however, sales in the three previous months were revised down, combined. I'll have more later today.

Monday, May 22, 2023

Tuesday: New Home Sales

by Calculated Risk on 5/22/2023 08:18:00 PM

Mortgage Rates From Matthew Graham at Mortgage News Daily: Mortgage Rates Approaching 7% Again

[M]ost of the past week saw the average top tier rate at 6.625% or higher for the average lender. And as of today, we're painfully close to 7.0% again. To be fair, we were already close to 7.0% on Friday. Most lenders didn't move much higher since then, and many lenders were already there. ... What's behind the spike? In general, the market is coming to terms with the possibility that the Federal Reserve may not have been that off-base over the past few months as it has maintained the need to keep rates "higher for longer." [30 year fixed 6.67%]
emphasis added
• At 10:00 AM ET, New Home Sales for April from the Census Bureau. The consensus is for 660 thousand SAAR, down from 683 thousand SAAR in March.

• Also at 10:00 AM, Richmond Fed Survey of Manufacturing Activity for May.

Final Look at Local Housing Markets in April

by Calculated Risk on 5/22/2023 11:56:00 AM

Today, in the Calculated Risk Real Estate Newsletter: Final Look at Local Housing Markets in April

A brief excerpt:

California Home Sales Down 36.1% YoY in April, Median Prices Decline 7.8% YoY

Here is the press release from the California Association of Realtors® (C.A.R.): Higher mortgage rates and low housing inventory restrain California home sales in April, C.A.R. reports
• Existing, single-family home sales totaled 267,880 in April on a seasonally adjusted annualized rate, down 4.7 percent from March and down 36.1 percent from April 2022.

• April’s statewide median home price was $815,340, up 3.0 percent from March and down 7.8 percent from April 2022. ...
And a table of April sales.

NAR vs Local Markets NSAIn April, sales in these markets were down 26.1%. In March, these same markets were down 20.5% YoY Not Seasonally Adjusted (NSA).

This was a larger YoY decline NSA in April than in March for these markets, however there was one less selling day in April this year.
My early expectation is we will see a somewhat similar level of sales in May as in April. 30-year mortgage rates averaged about 6.4% in February and March (for closed sales in April), and 30-year rates averaged 6.44% in March and April (about the same).
More local data coming in June for activity in May!
There is much more in the article. You can subscribe at

What Happened to "Paying off the National Debt"?

by Calculated Risk on 5/22/2023 10:31:00 AM

At the turn of the millenium, the concern was that the US was paying off the debt too quickly!

Here are a few excerpts from a speech by then Fed Chair Alan Greenspan in April 2001: The paydown of federal debt

"Today I want to address a subject in which your group and the Federal Reserve share a keen interest--the paydown of the federal debt and its implications for the economy and financial markets. While the magnitudes of future federal unified budget surpluses are uncertain, they are highly likely to remain sizable for some time. ...

[C]urrent forecasts suggest that under a reasonably wide variety of possible tax and spending policies, the resulting surpluses will allow the Treasury debt held by the public to be paid off. Moreover, well before the debt is eliminated--indeed, possibly within a relatively few years--it may become difficult to further reduce outstanding debt to the public because the remaining obligations will mostly consist of savings bonds, well-entrenched holdings of long-term marketable debt, and perhaps other types of debt that could prove difficult to reduce."
What went wrong over the last 20+ years?

Here is a list of events and policy choices that significantly increased the debt after 2000:
1) The 2000 projections were overly optimistic.
2) The 2001 recession.
3) The 2001 and 2003 Bush Tax Cuts.
4) 9/11, Homeland Security Spending and the War in Afghanistan
5) The War in Iraq
6) The Finacial Crisis and Great Recession
7) The Trump Tax Cuts
8) The Pandemic.

Here is a brief discussion ... (books have been written on each of these topics):

1) Overly Optimistic Projections: Here are the CBO projections from July 2000: The Budget and Economic Outlook: An Update

CBO Deficit Projection Click on graph for larger image.

The CBO projections showed an almost $6 Trillion in debt reduction in the 2001 through 2010 period.

I argued in 2000 that these projections ignored possible negative events such as an investment led recession due to the bursting of stock bubble. These projections were clearly overly optimistic.

2) The 2001 Recession: Although Greenspan mentioned "the current slowdown in economic activity" in his April 2001 speech, he didn't realize the economy was already in a recession. From the May 2000 FOMC minutes:
"The information reviewed at this meeting suggested that economic growth had remained rapid through early spring.."
The economy was already in a recession! 

3) Bush Tax Cuts: These tax cuts were sold as slowing the growth of the surpluses (using Greenspan's speech for cover)!  Instead, the tax cuts (mostly for the wealthy) turned the surpluses into deficits and reduced revenue by $1.5 trillion or more over the 2001 - 2010 period.

4) 9/11, Homeland Security Spending and the War in Afghanistan: The 9/11/2001 attacks led to a sharp increase in homeland security spending and the War in Afghanistan.

5) The War in Iraq: The Bush administration argued the war would cost around $80 billion.  VP Dick Cheney said on Meet the Press: "every analysis said this war itself would cost about $80 billion".  Instead, the war cost well over $1 trillion (and countless lives were lost).  Note: I've mentioned on this blog that "I opposed the Iraq war, and was shouted down and called names like "Saddam lover" for questioning the veracity of the information."

6) The Financial Crisis and Great Recession.  This was the worst US recession since the Great Depression.   This led to the first $1 trillion annual budget deficit in US history and dramatically increased the national debt.   The causes of the bubble were rapid changes in the mortgage lending industry, rating agencies that didn't account for those changes, combined with a lack of regulatory oversight.  I was talking with field regulators in 2005 and 2006, and they were all terrified.  I was told the appointees at the top of the agencies were blocking any effort to tighten standards. 
Cutting Red TapeThere were various Inspector General reports that the Fed and FDIC field examiners were expressing significant concerns in 2003 and 2004, but Greenspan was blocking all efforts to tighten standards - and the Bush Administratio was loosening bank regulations!

This photo shows John Reich (then Vice Chairman of the FDIC and later at the OTS) and James Gilleran of the Office of Thrift Supervision (with the chainsaw) and representatives of three banker trade associations: James McLaughlin of the American Bankers Association, Harry Doherty of America's Community Bankers, and Ken Guenther of the Independent Community Bankers of America.

7) The Trump Tax Cuts: These tax cuts - mostly for the wealthy - were sold with several promises - all failed. See: The Failed Promises of the 2017 Tax Cuts and Jobs Act (TCJA). A couple of quote:
“Not only will this tax plan pay for itself, but it will pay down debt,” Treasury Secretary Steve Mnuchin, Sept 2017

“I think this tax bill is going to reduce the size of our deficits going forward,” Sen. Pat Toomey (R-PA), November 2017
Complete nonsense.

8) The Pandemic: Deficit spending increased sharply due to the pandemic.

Annual Budget DeficitsHere is a graph of the actual annual deficits since 2000.

Note: This is not adjusted for the growth of the economy. Later I'll post a graph showing the annual deficit as a percent of GDP.

So, what happened to "paying off the debt"? A series of adverse events (9/11, pandemic), and poor policy choices.

Note that all the "poor policy choices" were by Republicans including tax cuts, the Iraq War, and failure to properly regulate.

We cannot always avoid adverse events, but I opposed each of these poor policy choices as they happened - so these are clearly avoidable.

In Joys of Yiddish, Leo Rosten gives the classic definition of "Chutzpah":
“Chutzpah is that quality enshrined in a man who, having killed his mother and father, throws himself on the mercy of the court because he is an orphan.”
As far as the budget, the GOP has made a series of poor policy choices and now they want to cut the programs for the poor and middle class. Talk about Chutzpah!