More Home Softening Noted in Report to Federal Reserve
With the nation’s housing market continuing to soften through the start of this month, home builders may have to travel to North Dakota to find truly “robust” market conditions, according to the Federal Reserve's Oct. 12 “Beige Book” report summarizing economic conditions in the 12 Fed districts.
While commercial real estate was strong virtually everywhere, with some mixed reports in areas like Chicago and St. Louis, “nearly all districts reported that housing market conditions continued to soften, though several noted that activity increased in some markets,” the report said. “Most districts reported higher home inventories, and several said that home builders and sellers continued to offer incentives to attract buyers.”
The report also noted that demand for residential mortgages slowed in the districts of New York; Philadelphia; Cleveland; Richmond, Va.; Atlanta; Chicago; Dallas and San Francisco.
And conditions in the labor market, a source of inflationary concerns for the Fed, remained “taut,” the report noted. Labor markets in Boston, Philadelphia, Richmond, Minneapolis and Dallas were characterized as “generally tight,” especially for skilled workers, while the remaining districts noted that job growth was steady to stronger over the preceding period reviewed in the Beige Book.
Mortgage Rates Up for the Week
Although the Fed appeared to have ended its interest rate hikes this summer, leaving its federal funds rate unchanged at 8.25% at its last two policy-setting meetings, members of the board have indicated that inflationary pressures have still not been reduced to optimal levels, and inflationary concerns helped nudge up mortgage rates last week.
The average rate on a 30-year fixed-rate mortgage rose to 6.37% for the week ending on Thursday, Oct. 12, up from 6.30% the prior week, according to Freddie Mac's Primary Mortgage Market Survey. The average rate on a one-year Treasury-indexed ARM climbed from 5.46% to 5.56%.
“Renewed concern that inflation is still an issue put some upward pressure on bond yields, which generally translates into higher interest and mortgage rates,” said Frank Nothaft, Freddie Mac’s chief economist. “ARM rates especially felt the weight of increased inflation fears, narrowing the gap between ARMs and fixed-rate mortgage rates. Thus, ARMs may become less desirable.”
Here’s how the Beige Book portrayed housing market conditions before Oct. 2 in the Fed regions where specific comments on this segment of the economy were provided:
- Boston. In Massachusetts, the average amount of time a home was on the market increased by a full month since last year, to around 110 days. Sources for the Fed’s report “attribute slower sales to less urgent buyers focused on getting the highest value for their money.” Inventories have been building up in most New England markets. In Massachusetts, single-family inventory has increased 16% and condominium inventory was up 28%, year over year, with about a 10-month supply of housing currently on the market. Sellers have become more willing to reduce their prices. The median price of single-family homes sold in Massachusetts in August was down about 6% from a year earlier and corresponding condo prices were down 3%.
- New York. Northern New Jersey and upstate New York have weakened further. One source in New Jersey noted pronounced weakening in the subcontracting business, which was traced back to weakening home remodeling and reduced home equity. By contrast, Manhattan’s co-op and condo market showed signs of resilience in the year's third quarter. Based on data from a leading appraisal firm, both the number of apartments sold and the price per square foot were up roughly 6% from a year earlier, despite a sharply higher inventory of available units. Another firm estimates that rents are up 5% to 10% from a year earlier on studio and one-bedroom apartments and up 10% to 15% on larger units.
- Cleveland. Year-over-year sales declines of 10% are common, with a few contacts for the report saying the market is down by as much as 60%. Several contractors reported that they no longer have any backlog. “Most home builders expect sales to remain soft for the remainder of the year, with 2006 totals to be below those in 2005,” the report said. “Many contacts said that material costs have stabilized over the past couple months, with a few noting a drop in the price of lumber. About half the home builders contacted reported reducing their labor force through direct layoffs or by not replacing workers that leave.”
- Richmond, Va. Residential real estate agents across the district noted generally lower home sales in September. A Washington, D.C. agent described the area’s housing market as “horrible,” adding that sales volume was down 25% from a year earlier, that home inventories had risen sharply and that some sellers were trimming asking prices. An agent in Virginia Beach, Va. said that buyers were being more selective, weakening sales. By contrast, contacts described the Charlotte, N.C. market as strong, and an agent in Greenville, S.C. reported good local housing market conditions.
- Atlanta. Weakness was most pronounced in Florida, although there were scattered reports of deteriorated conditions in Alabama, Georgia and Tennessee. Reports from the Mississippi Gulf Coast were more robust, although the pace of construction in New Orleans remained at low levels. The high cost of insurance remained a major problem for property owners in the Gulf Coast area.
- Chicago. Demand has been sluggish in all market segments, according to home builders throughout this Fed region, and a Chicago-area builder said that high-end properties have been taking noticeably longer to sell. A contact in the Milwaukee area said that traffic through model homes was holding up well, but builders in southeast Michigan reported a number of project cancellations. New home prices have been steady to down, and several builders were adding free upgrades to help sell homes. List prices of existing homes were also being reduced, according to a contact in Michigan.
- St. Louis. Home sales increased 11% in Memphis. Tenn. and were relatively unchanged in Louisville, Ky. compared to the same period of 2005. August year-to-date home sales declined about 2% in both St. Louis and Little Rock, Ark. Compared with the same period of last year, August year-to-date single-family housing permits were down in nearly every metro area in the Fed region, falling: 34% in Louisville, 21% in greater St. Louis, 11% in Memphis and 8% in Little Rock. Permits were up 12% in Jackson, Tenn. and 2% in Fayetteville, Ark.
- Minneapolis. Residential construction continued to weaken around the Fed region. Contractors in Minneapolis were heard by one contact describing activity there as slow. “A proposed condominium development plan in St. Paul was delayed,” the report said, “and there is doubt about whether some downtown Minneapolis condo developments will go forward. However, a western North Dakota director described residential construction in his areas as robust. August home sales in Minneapolis-St. Paul were down 27% from 2005, with pending sales down 23%. Sales were down 10% in the Upper Peninsula of Michigan, with the market for recreational land the only strong segment there. A representative of a Realtors® association in Sioux Falls, N.D., described the market there as on pace with last year’s record-breaking levels, with lower-priced homes driving the market.
- Kansas City. Home starts, traffic of potential buyers and home prices were down compared to a year earlier, and inventories of existing homes were rising and taking longer to sell despite the increased use of concessions to attract buyers. “Home sales were soft in most segments of the housing market,” the Beige Book said, “with particular weakness in low to moderately priced housing markets. Builders expected home starts to decline further, due in part to normal seasonal slowing.”
- Dallas. While continuing to soften, the market remains “quite strong,” with sales particularly good in Houston; Austin, Texas; and El Paso, Texas. Dallas real estate agents say that “buying fervor” is a little slower, but relocations and healthy job growth are still boosting activity. “New home inventories have inched up, despite strong demand in some markets,” the report says. “Building is expected to slow from the rapid pace of growth seen earlier this year. While the market remains strong, contacts have become ‘more nervous and anxious’ in their outlook, especially given recent reports of a decline in housing sales and prices at the national level.” Apartment construction remains strong, and occupancies are near or above 90% in most areas. Some softness in Houston’s multifamily market was attributed to the “Katrina effect” as evacuees leave apartments for permanent residences.
- San Francisco. Demand for residential real estate fell in most areas of the region, with the pace of home sales, construction and price appreciation slowing further in most places. Contacts in some areas noted that developers have been offering price concessions and other incentives to entice buyers. In the areas where home demand has been resilient, builders continue to face backlogs and high costs. “In other areas, however, overall building activity has fallen, and contacts noted that reduced home demand has led to layoffs for mortgage brokers and real estate agents.”
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