California Association of Realtors Market Update

Policy makers in Washington D.C. avoided a default on its debt obligations as Congress and the Whitehouse engineered a last-minute deal to raise the debt limit. In anticipation of the agreement, mortgage rates have already been heading down for several days after having risen above 7% as worries over the debt ceiling reached fever pitch. And despite higher rates in May, the U.S. labor market showed little signs of cooling down as employers added nearly 340,000 new jobs last month—well above expectations and raises the prospect that the Fed may have to raise rates one more time to help get inflation under control.  

Mortgage rates dip slightly as debt ceiling crisis is avoided: Although the Freddie Mac primary mortgage market survey showed the average 30-year fixed rate mortgage (FRM) for the week ending June 1, 2023 climbed to 6.79%, the early signs of a debt ceiling agreement helped to bring the daily mortgage rates down from 7.14% earlier in the week into the high-6s once again. As the main jump in rates has already occurred, the decline in mortgage demand has begun to slow and new applications are declining by less each week. However, the purchase index remains depressed and homebuyer demand is expected to remain below pre-pandemic levels as rates remain in the 6-7% range until inflation abates.

Exceptionally strong jobs report keeps pressure on the Fed: Despite the Fed’s best efforts to put the brakes on the macro economy with aggressive interest rate hikes, the labor market continues to outperform expectations. In May, there were 339,000 net new jobs created in the U.S. economy, which was well above the consensus forecast. This shows that the labor shortage that began during the pandemic due to both the shutdown of the service sector and early retirement remains stubbornly high. With wage growth playing a significant role in the ongoing battle against inflation, the continued strength of the job numbers keep the Fed in the spotlight as markets wait to see if they will raise rates one more time at their upcoming meeting on June 13-14.

Consumer confidence slipping despite strong jobs data: Although more jobs were created in May, consumers have begun to worry about job prospects in the future. Overall consumer confidence dipped in May, but only slightly. However, fewer reported ‘plentiful’ job opportunities and fewer workers are quitting jobs than even the pre-pandemic levels. As jobs become less abundant it may help to ease inflation, but it will also mean less wage growth and together with less savings, rising credit card debt, and credit that is less available as standards tighten, we may begin to see consumers take a step back after having served as the primary engine of economic growth for the past 3 years. In fact, plans to buy big-ticket items in the near future was down across the board in May.

Housing market continues to heat up amidst tight inventory: Despite higher interest rates and rising economic uncertainty, California’s housing market continues to get more competitive as demand outstrips available supply. Sales look to have risen slightly in May, but inventory remains extremely tight. New listings had already begun to decline in May, when they typically increase through the summer before falling off again in the fall and winter. As a result, homes are selling much more quickly than they were a few months ago—a median of 15 days last week vs. 42 days back in January. In addition, more buyers are paying premiums as roughly 50% of all sales closed above list price in the past two weeks after having dipped to just 20% of the market at the start of the year.

Construction spending improves, but manufacturing sector slowing: Construction spending was up for the 3rd consecutive month, according to recent estimates from the Census Bureau. Overall, spending rose 1.2% in April, which translates into an annual increase of 7.2%. Building material inflation has moderated considerably, but the construction supply chain is still not functioning as it was prior to the pandemic. Construction job openings were up 383,000 in April, but are still down from the peak in Dec 2022 by 488k. Most of the growth last month was concentrated in multifamily and non-residential projects. Overall, residential spending rose 0.4% over the month and is running 9.1% below year-ago levels. Private single-family spending fell 0.8% over the month, the 12th straight monthly decline.

New home sales increased for 2nd month in a row: Builders benefited from low inventory of existing homes in April, as more buyers turned to new construction as an alternative. Sales of new homes rose 4.1% to a 683,000 seasonally adjusted annual rate in April – the highest pace since March 2022. That puts new home sales 11.8% higher than their pace one year ago. At the regional level, sales in the West declined 9.1% month-over-month in April, after surging to the highest level in ten months in March. April sales also dipped 2.8% from the same month of last year. Builder incentives continue to motivate buyers towards new construction, but they are becoming less common as housing demand stabilizes and inventory shrinks. Still, the 7.6 months’ supply of new homes remains substantially higher than the 2.9 months’ supply of existing homes.

Courtesy of the California Association of Realtors