Category Archives: National Economy

High Mortgage Rates are Decreasing Mortgage Applications

High Mortgage Rates are Decreasing Mortgage Applications

For the majority of Americans, buying a home requires a mortgage loan. There are many factors that impact a person’s ability to purchase a home, but a mortgage will always be one of the most significant factors in determining whether a house is affordable or not. Given the impact they have on your monthly payments, mortgage rates are also relevant.

Mortgage Rates

Mortgage Rates

When mortgage rates are higher, less mortgage applications tend to be filed. What has been happening as of late, is a fluctuation of mortgage rates that has made home purchases difficult to predict. The Mortgage Bankers Association keeps track of changing mortgage rates, and publishes the numbers. In the last month, the country has seen mortgage rates plunge, and then recover, and then go back down again. The market is volatile right now because of the US’s relationship with China, and home buyers are making sure to only act when rates are low. 

 

Refinancing of homes is also impacted by mortgage rates. Generally homeowners will refinance their mortgages for the purposes of lowering their monthly payments. Due to this, applications for refinancing loans are extremely sensitive to changing mortgage rates. Mike Fratantoni, the Senior Vice President and Chief Economist of the Mortgage Bankers Association, commented on interest rates:

 

Interest rates continue to be volatile, with Brexit votes and ongoing trade negotiations swinging rates higher or lower on any given day…Borrowers with larger loans are the most sensitive to rate changes, and with rates climbing higher last week, the average size of a refinance loan application fell to its lowest level this year.

Home Sales Projections

Home Sales Projections

Mortgage applications to purchase a home have certainly been falling compared to weeks prior, but the good news is that the numbers are still better than a year prior. This is good news for the market. Additionally, there is hope that the market could be improving in the near future. Joel Kan, the Mortgage Bankers Associations’ Associate Vice President of Economic and Industry Forecasting, had his own comments on the state of mortgage rates.

 

U.S. Treasury yields trended downward over the course of last week, as the Federal Reserve meeting highlighted the elevated uncertainty in the economic outlook. However, despite falling yields, mortgage rates ticked up again and have risen 20 basis points over the past two weeks…The increase in rates led to fewer refinances, and activity has now dropped 17% over the last two weeks…The recent data on increased existing-home sales and new residential construction points to the underlying strength in the purchase market this fall.

 

Kan believes that buyer demand was stronger than expected. If this trend continues, prices on homes will be higher, and the supply of homes for sale will lead to a stronger housing market. That would, of course, be the preferred outcome, however sales are not increasing as much as they should be given the lower mortgage rates as compared to those from one year ago. Home sales should be increasing, but due to home prices being too high, any savings made through lower mortgage rates is being negated. 

 

The National Association of Realtors reported the increase in September’s home prices, and experts point to a lack of supply for the unexpected falls in sales. Diana Olick, a real estate correspondent with CNBC explained:

 

The problem is low supply combined with high prices; prices jumped nearly 6% annually, according to the National Association of Realtors, the biggest gain since January 2018. Prices are being juiced in part by lower mortgage rates. Lower rates help with affordability, but they also give buyers more purchasing power, which in turn causes prices to rise.

 

Matthew Speakman, a Chief Economist at Zillow, agreed with Diana, and doubled down:

 

Much of the sales boost this summer can be chalked up to interest rates dragging along the bottom this year, which enticed more would-be buyers into the market…Now, sales are coming back to earth, largely because of an ongoing shortage of inventory. There simply are not enough lower-priced homes to keep the market humming. While builders are putting up more homes, their pace is not keeping up with what buyers demand.

rates dragging along the bottom this year

Going Forward

Mortgage rates have fluctuated quite a bit, and these rates have negatively impacted mortgage applications, refinancing, and home sales. The fluctuation can be attributed to many things, but the fact remains that at the moment, the housing market has seen dips in sales. When the mortgage rates are high, potential homebuyers don’t buy, and homeowners don’t refinance. When mortgage rates are low, demand ends up driving prices up, which keeps people from purchasing. The foreign influences on mortgage rates are also a factor in the fluctuation.

 

Going forward, the market needs to see an increase in construction, and the best way for this to take place is through competition. With new players breaking in to the industry, the burden of additional home development won’t be placed on the builders that are currently holding back on the number of production projects they take on.

Obama Era Executive Order to Raise Minimum Wage for Federal Contractors

Obama Era Executive Order to Raise Minimum Wage for Federal Contractors

The US Department of Labor’s Wage and Hour Division published a notice to announce that minimum wage for federal contractors will increase to $10.80 per hour from $10.60. A change that has become a regular occurrence thanks to the Obama Administration.

 

This regular minimum wage increase is the result of the Obama Administration’s Department of Labor’s final rule which implements Executive Order 13658. The order determined that a minimum wage would be set for contractors to pay their workers for work completed for federal contracts. This minimum wage started at $10.10, but has had consistent annual increases.

Explaining the Minimum Wage Increase

Explaining the Minimum Wage Increase

The executive order states:

 

This order seeks to increase efficiency and cost savings in the work performed by parties who contract with the Federal Government by increasing to $10.10 the hourly minimum wage paid by those contractors. Raising the pay of low-wage workers increases their morale and the productivity and quality of their work, lowers turnover and its accompanying costs, and reduces supervisory costs. These savings and quality improvements will lead to improved economy and efficiency in Government procurement.

 

As stated in the executive order, the original minimum wage standard was $10.10, and now (over the course of 5 years), it has grown to $10.80. Assuming that the executive order is not undone, there will be more minimum wage increases in the future. Is this what’s best for the construction industry though? Some people don’t think so. 

Opposition to the Executive Order

Opposition to the Executive Order

Associated Builders and Contractors, Inc. submitted a letter to the administration with concerns over the executive order. They claimed that it would cause confusion amongst government contractors, and lead to additional burdens thanks to unnecessary regulation. 

 

The regulation itself was seen as unnecessary due to the majority of government contractors already surpassing the $10.10 threshold in paying their workers. There were also concerns about setting a precedent where a government can come into an industry and tell them what to pay workers. Years later, the opposition to the executive order still exists, however, the order has not been rescinded.

Explaining the Execution of the Minimum Wage Increase

Explaining the Execution of the Minimum Wage Increase

The final rule/fact sheet attempts to address the concerns of contractors by breaking down the obligations that contracting agencies, contractors, and even the Department of Justice have. Not only does this attempt to address those concerns, but it also explains how the order is to be enforced. The final rule explains that the process itself “should be familiar to most government contractors and will protect the right of workers to receive the new $10.10 minimum wage. The Department of Labor generally has adopted existing mechanisms for enforcing long-established prevailing wage laws to enforce the provisions of the Executive Order”. It even confirms that around 200,000 workers will benefit from the order.

 

The obligations for contracting agencies, contractors, and the Department of Labor are broken down as follows:

 

Contracting agencies are responsible for ensuring that the contract clause implementing the Executive Order minimum wage requirement is included in any new contracts or solicitations for contracts covered by the Executive Order. Contracting agencies are also responsible for withholding funds when a contractor or subcontractor fails to abide by the terms of the applicable contract clause, such as by failing to pay the required Executive Order minimum wage, and for forwarding any complaints alleging a contractor’s non-compliance with Executive Order 13658 to the Wage and Hour Division.

 

Contractors and subcontractors must include the Executive Order contract clause in any covered lower-tiered subcontracts. They also must notify all workers performing on or in connection with a covered contract of the applicable minimum wage rate under the Executive Order. Contractors and subcontractors must pay covered workers the Executive Order minimum wage for all hours worked on or in connection with covered contracts, and must comply with pay frequency and recordkeeping obligations. Finally, the final rule prohibits the taking of kickbacks from wages paid to workers on covered contracts as well as retaliation against any worker for exercising his or her rights under the Executive Order or the implementing regulations.

 

The Secretary of Labor is required to determine the Executive Order minimum wage rate yearly beginning January 1, 2016, and publish this wage rate at least 90 days before the wage is to take effect. The final rule outlines the methods that the Department will utilize to notify the public of the Executive Order minimum wage,

 

Finally, the order explains how complaints against it can be taken up. It outlines a process for filing these complaints with the Wage and Hour Division. It also allows for investigations into instances of believed violations or abuses of the executive order, as well as resolutions/consequences for these violations. Lastly, the order provides an administrative process for resolving legal disputes over the order’s enforcement.

Going Forward

Despite opposition by contractors and contracting organizations, the executive order was submitted and enforced. This bill focuses on workers, and paying them a wage that the government believes to be fair. The final rule also states that it accomplishes this in a way that has long-been accepted, and in a way that multiple industries are familiar with. This should not only limit confusion, but prevent legal challenge due to the precedent of such laws being deemed as constitutional and acceptable.

 

There may still be opposition from contractors, however, the order is still in effect, and for now it looks like it will stay in effect moving forward.

Demographic Changes That Will Impact Real Estate

Demographic Changes That Will Impact Real Estate

As the years progress, audiences change, and this includes target audiences. When you work in residential real estate, your entire region serves as a target audience, so the best way to measure changes in that audience is to look at changes in the demographics.

While every region has its own unique shifts, the United States as a whole has its own trends. These nationwide demographic changes will impact local residential real estate over time. Richard Fry, a researcher at the Pew Research Center, decided to investigate these nationwide trends to determine how residential real estate will be affected. Specifically, he projected what the state of the industry would be by the year 2065.

Current Demographic Changes

Current Demographic Changes

Click to enlarge image

Through his research, Fry was able to find 5 demographic changes that will impact what housing units residents are willing to spend their money on, and why. In no particular order, here are his findings:

 

  1. If you are looking at demographics decades into the future, then present birth rates will naturally have a significant impact. Currently, young Americans are not having children at the same rate as the generations that came before them.

    In 1980, 43% of women 18 to 29 had at least one child. Today, that number has dropped to 30%.

    Millennials are waiting to have children, and this directly impacts the types of housing units that will be in demand in upcoming years. This also affects where those units will be purchased or rented.
    downtown assets
  2. Currently there is a trend that shows that Americans and many millennials are moving away from the suburbs to live in the city. This is also impacted by millennials waiting to have children. This focus on work will decrease demand for suburban housing, and increase the traffic towards city apartments.

    Demand could bolster the market’s already-frothy prices for downtown assets, and perhaps discourage some development in the suburbs.

    When more millennials do begin to start families, it is possible that this trend reverses. For now, however, urban growth is worth the investment for the years leading up to that potential family formation.
  3. Birth rates don’t just impact where people choose to live; they also impact household size. Around the country, household sizes are increasing. Not only are millennials not having children as easily, but with economic hardships increasing foreclosure rates, families find themselves living together under one roof. Students and graduates are continuing to live at home, and older parents are moving in with their adult children.

    An increase in average household size is much of the reason why demand for new housing has been so sluggish, even as the wider economy has recovered.

    With families coming together like this, demand for new homes naturally decreases. However, if you are in the homebuilding business, homes that can accommodate multiple generations will help facilitate these new family dynamics.
  4. While studying current Americans can provide insight into future changes to residential real estate, there are also benefits to looking outside the United States. Currently there are over 350 million Americans in the US, but Fry predicts that the population could grow to 441 million by 2065. Fry attributes this growth to immigration.

    Taking middling, reasonable assumptions about immigration – 1 million immigrants per year – the American population should grow to 441 million by 2065. Now let’s suppose we switch off immigration…By 2065, we would only have 338 million Americans. Without immigration, there’s very, very little population growth at all.

    The highs and lows of real estate demand will be determined by immigration, and how it grows or declines over the years. The policies that influence immigration will then have an indirect influence on real estate demand. It also follows that areas that typically have a high percentage of immigrants will see increases in demand, as immigration into the country increases.
  5. The final of these demographic changes connects everything together. Residential real estate will be impacted in multiple ways by racial and ethnic diversity moving forward. Currently the US population is made up of 60% non-Hispanic white residents. According to Fry, however, white Americans are not having children at the same rate as other races. This will have an impact on future household sizes.

    Only 16% of the white population in the U.S lives in a multigenerational household, compared to 29% of the Asian American population, 27% of the Latino population and 26% of the black population.

    When building residential housing in the future, it is necessary to consider the population and its racial/ethnic background, how that will impact household size, and where people with those household sizes tend to live (city vs. suburbs).

Look at changes in the demographics

Going Forward

The real estate industry needs accurate information to understand who is willing to spend money on what housing units. Knowing where people choose to live, and what they need out of their living quarters will provide the necessary insights for developing the right housing units, and selling them successfully.

The Beat Goes On in The East End

Walnut Capital brought plans before the city’s Planning Commission today for what it’s calling Bakery Square Refresh. The Refresh project involves the demolition of the small retail building on the outparcel on Penn Avenue and construction of a two-story, 12,400 square foot retail building that will connect to the original Nabisco bakery. The $5 million Refresh is being designed by Strada Architecture and PJ Dick is the contractor. According to Walnut’s CEO, Gregg Perelman, the new construction – which will be home to several restaurants – is to be ready next October when Phillips occupies its new space in Bakery Square Three. That means construction will start around the first of the year.

The 2-story Bakery Refresh will be adjacent to the Nabisco bakery building. A new green space will be created along Penn Avenue. Rendering by Strada Architecture LLC. Use courtesy Walnut Capital.

Around the corner from Bakery Square, Echo Realty is moving forward with its Shady Hill Center. The project involves 220 units of apartments, to be developed by Greystone Real Estate Partners, a 500-car parking garage, and the replacement of the Giant Eagle with a new 37,000 square foot store. Carl Walker Construction has been selected to build the parking garage.

Data on employment and unemployment was released on the national and regional level within the past week. The job creation data for Pittsburgh showed modest improvement, with 5,500 more jobs in August 2019 than one year before. Unemployment fell by 0.3 points to 3.9%. The good news inside the Pittsburgh metro data, which came from PA’s Department of Labor, was the net growth of employment. The workforce grew by 18,400 from August-to-August, while the number of unemployed fell by 1,000. Retiring Baby Boomers are putting great downward pressure on the workforce supply in Pittsburgh. That the number of people working grew by more than 1.5 percent suggests that the gains in employment are offsetting the demographics for now.

US job growth was better in September than in previous months, according to the Census Bureau’s report on October 4. There were 136,000 new jobs in September. Estimates for July and August were also revised upward by nearly 60,000 jobs. The headwinds on the economy are certainly growing, but US employers are still adding to payrolls.

WeWork and Pittsburgh’s Construction Economy

The spectacular collapse of WeWork over the past 30 days has garnered few headlines in Pittsburgh. That makes sense, if you consider that the company isn’t headquartered here, has few employees here, and is only beginning to build out its first co-working space in Pittsburgh now. But the story of WeWork’s rise and fall sent a chill through me, reflexively dredging up memories of the bursting of the dot.com bubble in 1999-2000. WeWork’s story may be an isolated case of a founder’s vision intoxicating investors but, if it is not, the problems that WeWork’s business exposed could be more structural.

The highlights of the story are that WeWork was the Apple or Uber (more on that) of the co-working trend. In New York and Chicago, WeWork was the largest single leaseholder in those cities. Sit with that for a moment. Its rise, and the vision its founder spun, attracted one of the wealthiest venture capital sources, SoftBank’s Vision One Fund. The company was preparing for an IPO next month. Goldman Sachs was telling investors that the company would be worth $60-90 billion once public. The Securities Exchange Commission’s S-1 filing showed that WeWork was a one-company bubble. As the business media and public investors began to digest the company’s financials, the wheels fell off. There was no sustainable business model. Within a couple of weeks, the CEO was fired/resigned, selling his stake for $750 million. This unicorn of commercial real estate saw its value decline by $30 billion, and is likely heading to zero.

There is an excellent interview in New Yorker magazine with an NYU Stern Business School professor who first rang the alarms on WeWork in August. (Note: the professor’s language is salty)

What is frightening about WeWork’s story is what it says about investors. The biggest losers in the collapse will be WeWork’s 15,000 employees. Right behind them is SoftBank, which provided $11 billion to WeWork from its Vision One Fund. As a capital source, SoftBank will be fine. Its investors will also be fine, but the Vision One Fund, which raised $100 billion for unicorns like WeWork and Uber, is damaged. It’s the latter unicorn that should alarm Pittsburghers. Uber has seen about $9 billion from SoftBank and the fears are growing that Uber is another company that is peddling an unsustainable business model and unlimited growth without a foundation. Uber’s footprint in Pittsburgh is several times the 105,000 square feet that WeWork signed on for at 600 Grant Street. Of greater concern is what might follow if Uber’s value falls dramatically too.

The concern is not about individual tech companies flaming out, it’s that investors will flee from emerging technology companies in general. Stocks aren’t really an asset class in the way that bonds or commercial real estate is. Value isn’t as sturdy. But stock investors aren’t spooked by the occasional corporate flameout. It happens. When there are several spectacular flameouts in a short time period, however, investors naturally suspect that the problem is the industry rather than the companies. That was what burst the dot.com bubble. Tech companies lost 80 percent of their value on average. That made growing and expanding difficult. Investors don’t have a lot of places to put their money with comfortable returns today, but that has lulled many investors into forgetting that the risks aren’t always commensurate with the returns. It’s a frothy time and investors are susceptible to pitches that forecast solid returns. The problems come when it takes a highly risky investment to get a solid return.

That’s the chill that WeWork sends through me. Pittsburgh has seen a new era of prosperity arise from the successes of emerging technology. Emerging technology relies upon fresh investment to capitalize growth and the ultimate profitability that is sustainable. Many of the most promising technologies being developed in Pittsburgh are unfathomable to the average person (and maybe even the average genius at a VC firm). Artificial intelligence, robotics, advanced manufacturing, and autonomous vehicles are mysterious to most of us, and that includes some segment of the investor class. It’s important that investors remain confident that the breakthroughs being researched and developed in Pittsburgh can make it into the marketplace some day. Otherwise, our up and coming success stories could end up becoming the Lycos or FORE Systems of the 2010s. Keep an eye on the WeWork story. It may have ripples that reach Point State Park.

(Left-right) Rich Yohe, Bernie Kobosky and Scott Poillock at the MBA’s golf outing.

In construction news, A. R. Building has started construction on about $20 million in new apartments – Fox Plan and Evergreen Road – in Monroeville. The Buncher Company started work in the 20,000 square foot second phase of retail at Jackson’s Pointe north of Zelienople. Massaro Corp. was awarded the $1.5 million revolving door/entrance renovations at Fifth Avenue Place, the enabling project for Highmark’s $20 million lower level upgrade. W. K. Thomas & Associates started construction on a $1.2 million new facility for Butler Eye Care.

Housing Market Responds to Lower Rates – Pittsburgh Construction Market Awards

Recent reports on sales of existing homes and new construction show that buyers are motivated by the lower long term interest rates that inspired the two Fed Funds cuts this summer. August’s construction numbers were strong for multi-family and single-family construction. The rate environment seems unlikely to have made such a difference. Rates were already historically low. However, one of the major home buying demographic groups – Millennials – has proven to be very skeptical about home ownership; therefore, even small drops in the 30-year mortgage rate seem to be having the emotional impact that pushes shoppers to become buyers.

Wells Fargo Economics has a great short commentary on residential construction. An excerpt is below:

Higher builder confidence and an improving trend in single-family permits
indicate that new home construction is finally beginning to catch up to the higher pace seen in new home sales. Total housing starts jumped 12.3% to a 1.36 million-unit pace, the highest since June 2007. The headline number surpassed all expectations, but was driven to a large extent by a 32.8% surge in multifamily starts. New apartment construction, which is notoriously volatile on a month-to-monthbasis, had briefly dipped below trend the past two months, so a catchup in August is not surprising.
Still, single-family starts were quite solid, rising 4.4% to a 919,000-unit pace,
the highest since January 2019. Only three times in this long and gradual
housing recovery have we seen single-family construction at a higher pace
than in August. Single-family starts rose 3.6% and 5.3%, respectively, in the
South and West, the two largest regions for residential construction. They
were up 8.7% in the Midwest and down 1.7% in the Northeast. Nationwide,
year-to-date single-family starts are down 2.7% over the same period last
year.

In regional nonresidential construction news, decisions were made on several large projects that had been pending. The Gilbane/Massaro joint venture was chosen for the combined $200 million central utility plant/Human Performance Center at the University of Pittsburgh Victory Heights. Rycon Construction was awarded the $40 million UPMC Magee central utility plant/maintenance building. Rycon was also successful on the 200,000 square foot Phillips buildout at Bakery Square. Thomas Construction is starting construction on the $11.3 million Hoyt Science Center expansion at Westminster College.
CM proposals are being taken from Landau, TEDCO, Volpatt and Whiting-Turner on the $3.5 million CMU Mellon Institute Group 1920 lab renovations. Highmark is taking proposals from AECOM/Tishman, Mascaro, Massaro, PJ Dick, Rycon, Turner and Whiting-Turner on its $20 million lobby and exterior upgrade.

Construction Job Openings Hit a High

One of the bits of economic data that gets less mainstream media attention is a survey call the Job Openings and Labor Turnover Survey (JOLTS). The JOLTS measures how many openings there are and why, creating a “quit” rate that measures what percentage of turnover is due to workers quitting their job. The correlation between a higher quit rate and a good economy is very strong. The quite rate is high right now, a condition that is exaggerated by the shrinking workforce demographics. In the construction industry it’s a perfect storm of higher demand for construction and fewer workers.

The AGC’s chief economist, Ken Simonson, commented on the release of the JOLTS data last Friday. Here are Ken’s comments:

Job openings in construction at the end of July totaled 373,000, an increase of 59,000 (19%) from the July 2018 total and the highest July total in the 19-year history of the series. This was the 14th consecutive month of record job openings for a given month. (The data are not seasonally adjusted. Because hiring and openings in construction vary considerably from month to month, comparing openings across months is not meaningful.)

The industry hired 442,000 employees in July, 8,000 (2%) fewer than the number hired in July 2018 but the second-highest July total since July 2008. While the dip in hiring may be an early sign of cooling demand, it may also be an indication that employers could not find enough suitable candidates—which is consistent with the jump in openings at the end of the month. Combined filled and unfilled positions (hires + openings) in July were a record for the month.

There were 167,000 layoffs and discharges in July, and increase of 29,000 (21%) from July 2018 but roughly in the middle of the range of July layoffs over the past seven years. Layoffs have exceeded or matched year-ago levels for nine consecutive months, a possible indication of a slowing market—or of the industry hiring more workers without acceptable skills. The rate of layoffs (layoffs as a % of employees) has remained near the low end of each month’s range over the past seven years, suggesting there is no strong trend toward cooling demand for construction.

The quit rate in July was 2.8 per 100 employees, slightly less than the July 2018 rate (3.1) but still the second-highest rate since 2008. This suggests employees are finding opportunities elsewhere. The data do not show if they quit for other construction jobs, jobs in other industries, or are leaving the workforce. But a high quit rate is indirect evidence of continuing opportunities for employment in construction.

In sum, I think the data are consistent with a continuing strong construction market and with the results of the 2019 Autodesk-AGC of America Workforce Survey, which found that 91% of the 1,935 respondents expect their firms will hire hourly craft personnel in the next 12 months (19% for expansion, 72% for replacement). That result was very similar to the 2018 survey and the January 2019 Sage-AGC Hiring and Business Outlook Survey.

Click here to see Ken’s slideshow on the construction market.