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Mortgage Activity Declines in October as Mortgage Rates Increase

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The Market Composite Index, a measure of mortgage loan application volume by the Mortgage Bankers Association’s (MBA) weekly survey, decreased 13.9% month-over-month on a seasonally adjusted (SA) basis due to higher mortgage rates. This decline was reflected in both the Purchase and Refinance Indices, which fell by 4.4% and 23%, respectively. However, compared to October 2023, the Market Composite Index is up by 39%, with the Purchase Index seeing a slight 1.9% increase and the Refinance Index higher by 149.9%.

The average 30-year fixed mortgage rate reversed its downward trajectory with an increase of 36 basis points (bps), following volatility in the ten-year Treasury yield. This brought the rate back to around the same level as it was in August at 6.53%. However, compared to its peak last October, the current rate is 125 bps lower.

The average loan size for the total market (including purchases and refinances) was $390,225 on a non-seasonally adjusted (NSA) basis, a decrease of 2.6% from September. Purchase loans grew by 2.1% to an average of $448,675, while refinance loans declined by 11.3% to $323,750. Adjustable-rate mortgages (ARMs) saw a modest decrease of 3.4% in average loan size from $1.19 million to $1.15 million.

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Declines for Residential Construction Loans

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During the second quarter of 2024, the volume of total outstanding acquisition, development and construction (AD&C) loans posted the largest year-over-year percentage decline since 2012, as interest rates remain elevated before the beginning of the Fed cutting short-term interest rates in September. AD&C loan conditions will improve as the Fed progresses in its policy easing cycle.

The volume of 1-4 unit residential construction loans made by FDIC-insured institutions declined 3.5% during the second quarter. The outstanding stock of loans declined by $3.3 billion for the quarter. This loan volume retreat places the total stock of home building construction loans at $92 billion, off a post-Great Recession high set during the first quarter of 2023 ($105 billion). The decline in loan volume is holding back private builder home construction and acting as a limiting factor for home builder sentiment.

On a year-over-year basis, the stock of residential construction loans is down more than 10%, the largest year-over-year decline since 2012. This contraction for construction financing is a key reason home builder sentiment moved lower at the end of 2023, even as building activity accelerated, propelled by larger builder activity.

It is worth noting the FDIC data represent only the stock of loans, not changes in the underlying flows, so it is an imperfect data source. Lending remains much reduced from years past. The current amount of existing residential AD&C loans now stands 55% lower than the peak level of residential construction lending of $204 billion reached during the first quarter of 2008. Alternative sources of financing, including equity partners, have supplemented this capital market in recent years.

The FDIC data reveal that the total decline from peak lending for home building construction loans continues to exceed that of other AD&C loans (nonresidential, land development, and multifamily). Such forms of AD&C lending are off a smaller 7% from peak lending. For the second quarter, the outstanding stock of these loans was approximately unchanged.

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Energy Price Declines Lead the Way in September

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Prices for inputs to new residential construction—excluding capital investment, labor, and imports—decreased 0.6% in September according to the most recent Producer Price Index (PPI) report published by the U.S. Bureau of Labor Statistics. Compared to a year ago, this index was down 0.1% in September after an increase of 1.0% in August.

The inputs to new residential construction price index can be broken into two components­—one for goods and another for services. The goods component decreased 0.7% over the year, while services increased 1.0%. For comparison, the total final demand index increased 1.8% over the year in September, with final demand goods down 1.1% and final demand services up 3.1% over the year.

Input Goods

The goods component has a larger importance to the total residential construction inputs price index, around 60%. The price of input goods to residential construction was down 0.7% in September from August. The input goods to residential construction index can be further broken down into two separate components, one measuring energy inputs with the other measuring goods less energy inputs. The latter of these two components simply represents building materials used in residential construction, which makes up around 93% of the goods index.

Prices for inputs to residential construction, goods less energy, were up 1.5% in September compared to a year ago. This year-over-year growth has continued to slow since April when it was at 2.5% and remains well below growth in September of 2022 when it was at 14.3%. The year-over-year growth in September 2023 was 1.0%, making this year’s growth slightly higher. The index for inputs to residential construction for energy fell 23.5% in September, the largest yearly decrease since 26.1% in July 2023.

The graph below focuses on the data since the start of 2023 for residential goods inputs. Energy prices have retreated over the past year, with only two periods of growth in 2024.

Input Services

Prices of inputs to residential construction, services, fell 0.5% in September from August. The price index for service inputs to residential construction can be broken out into three separate components: the trade services component, the transportation and warehousing services component, and the services less trade, transportation and warehousing component. The most vital component is trade services (around 60%), followed by services less trade, transportation and warehousing (around 29%), and finally transportation and warehousing services (around 11%). The largest component, trade services, compared to last year was up 0.4% in September after increasing 2.1% in August.

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Two-Story Foyer Trend Declines in 2023

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In 2023, a quarter of new homes were built with a two-story foyer, down slightly from 26% in 2022, according to data obtained from the Census Bureau’s Survey of Construction (SOC) and tabulated by NAHB. The market share of two-story foyers has been generally trending downward over the past seven years, with most new single-family homes being built without a two-story foyer nationally and regionally.

According to the Census, a two-story foyer is defined as the entranceway inside the front door of a house and has a ceiling that is at the level of the second-floor ceiling. In the United States, the share of new homes with two-story foyers fell from 26% to 25% in 2023, closer to the low level seen in 2021. This feature is often considered energy-inefficient and is seen as undesirable by both builders and buyers. The declining trend is in line with NAHB’s What Home Buyer’s Really Want, in which recent and prospective buyers rated their preference for 18 specialty rooms. The study found that two-story entry foyers was one of the least desired specialty rooms, with 32% buyers likely to reject a potential home with this feature, and only 13% seeing it as an essential/must-have feature.

Regionally, the share declined in five of the nine divisions. The decline was particularly pronounced in West South Central and New England, reversing the notable increases seen in 2022. In both divisions, the shares have now returned closer to their 2021 levels. The Middle Atlantic and West North Central were the only two divisions to see an increase in the share of two-story foyers from 2022 to 2023, with both shares reaching their highest levels since 2017. Meanwhile, shares in the South Atlantic and Pacific remained unchanged in 2023.

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Custom Home Building Share Declines in 2023

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In 2023, 18.8 percent of all new single-family homes started were custom homes. This share decreased from the 20.4 percent recorded in 2022, according to data tabulated from the Census Bureau’s Survey of Construction (SOC). The custom home market consists of contractor-built and owner-built homes—homes built one at a time for owner occupancy on the owner’s land, with either the owner or a builder acting as a general contractor. The alternatives are homes built-for-sale (on the builder’s land, often in subdivisions, with the intention of selling the house and land in one transaction) and homes built-for-rent.   

In 2023, 71.5 percent of the single-family homes started were built-for-sale, and 9.7 percent were built-for-rent. At an 18.9 percent share, the number of custom homes started in 2023 was 177,850, falling from 207,472 in 2022. 

The quarterly published statistics show that the custom home share of single-family starts showed gains in the second quarter of 2024 after some recent slowing. Although the quarterly statistics are timelier, they lack the geographic detail available in the annual data set.

When analyzed across the 9 census divisions, the annual data show that the highest custom home share in 2023 was 35.5 percent in the East South-Central division. While the lowest share was in the West South-Central division, where the share was only 11.9 percent. The share of custom homes across U.S. divisions are showed in the map below.

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