California Market Minute
In the ever-evolving landscape of the real estate market, there's promising news for potential homebuyers. Mortgage rates have gracefully descended by more than 50 basis points from their recent peak, showing a positive trend over the past few weeks.
Although housing demand is still below the historical norm, there's a silver lining—the number of mortgage applications has been steadily on the rise for the past three weeks. This uptick is a reassuring indicator for the market, suggesting a potential boost in home sales in the upcoming months. Typically, a home sale transaction takes between 30 to 60 days to close, so we might witness a resurgence in sales by December or January.
As we embrace the holiday season, consumer spending remains robust, contributing to the resilience of the economy. Contrary to previous expectations, the slowdown in the economy may take longer to materialize. While the Federal Reserve may have concluded its rate hikes, any potential rate cuts might not be on the horizon until the end of the first quarter. The Fed is likely to closely monitor the economic landscape for clear signs of weakening before considering any adjustments.
In summary, the current real estate climate presents an optimistic outlook, with improving mortgage rates and positive signals for market resilience. Keep an eye on the evolving economic indicators as we navigate through the end of the year and into the first quarter of the new one.
Mortgage rates slide down to the lowest level since late September: Mortgage rates declined further during the Thanksgiving holiday and have reached the lowest point in nine weeks. The average 30-year fixed rate mortgage reported by Freddie Mac last week was 50 basis points below the recent peak recorded in late October. Rates remained flat on the first day after the holiday weekend but yield on both the 10-year Treasury and the 2-year Treasury slipped as investors await for key inflation data release later this week. The Personal Consumption Expenditures index – the Federal Reserve’s preferred inflation measure – will be available on Thursday morning and will offer another clue on the Fed’s next move. Mortgage applications, meanwhile, increased last week to the highest level in six weeks. According to the Mortgage Bankers Association’s weekly mortgage application survey, total mortgage applications for the week ending November 17 climbed 3% compared to the prior week. While mortgage demand is still below the historical norm, the increase observed in the past month is encouraging and the market will hopefully see more improvement in the coming weeks if rates continue to decline.
New home sales dip as mortgage rates hit 23-year high in October: With the average 30-year fixed rate mortgage (FRM) rising more than 100 bps in the late summer, demand for newly built homes pulled back at the start of the fourth quarter. Sales of new single-family homes declined 5.6% on a month-to-month basis and registered a seasonally adjusted annual rate of 679k in October. While the sale level was lower than the consensus expectations of 725k units, it was still 17.7% higher than what was recorded in the same month of last year. The slide in new home sales should continue in November, as fewer new home sales likely opened escrow last month since rates reached their 23-year high in late October. New housing inventory continued to improve with new for-sale units climbing to 437k, the highest level since January. October inventory level is equivalent to a supply of 7.8 months at the current sales pace and remains above the historical average of 5.9 months.
New constructions hold steady as builders’ confidence dips: Despite higher rates in October, the lack of existing housing supply continues to support demand for new construction in the fall. Housing starts were up 1.9% month-over-month and reached a seasonally adjusted annual rate of 1.37 million units in October. While single-family starts were essentially flat (+0.2%) from a month ago, the number surged 13.1% from last October. Construction in the multifamily sector also climbed 6.3% month-over-month but declined year-over-year by 30% as the demand for apartment buildings wanes. At the regional level, starts for single-family homes in the West increased 12.3% from September and surged 46% from the same month last year. And while the rise in rates between August and October might have dampened builders’ sentiment in the past few months with their confidence index dipping to the lowest level since December 2022, recent macroeconomic data suggests better conditions for home construction ahead and more units will be built in the coming months.
Black Friday spending tops last year’s level: The holiday shopping season got off to a good start, as U.S. retail sales on Friday, November 24 went up 2.5% year-over-year, according to Mastercard Spending Pulse. Online shopping was particularly strong as e-commerce sales jumped 8.5% from 2022, while in-store sales inched up 1.1% from the same time last year. Shopper visits, a measure used to assess in-person sales, also rose 4.6% compared to last year as reported by retail data firm Sensormatic Solutions. The consumers spending spree are expected to continue on Cyber Monday and U.S. shoppers are set to spend a record $12 billion to $12.4 billion online, according to Adobe Analytics. The spike in consumer spending was partly due to lower gas and food prices this year compared to last year. Shoppers are also more willing to finance their purchases in 2023. According to Adobe Analytics, $79 million of the online sales came from consumers who opted for the “Buy Now, Pay Later” flexible payment method, an increase of 47% from 2022. The spending strength, however, should taper off deeper into the holiday season as discounts weaken.
Small business owners remain pessimistic about their business outlook: Economic headwinds continue to weigh in on small businesses’ sentiment as the Small Business Optimism Index dropped slightly down to 90.7 in October, the 22nd month that the index dipped below the 50-year average. Inconsistent with the pattern of consumer spending resiliency displayed in other macroeconomic data, small business owners remain worried about deteriorating sales traffic as the net percent of small business owners who report an increase in sales plunged to -17%, the lowest reading since July 2020.