Sales of existing single-family homes in California edged up from the prior month, despite dropping sharply from a year ago. While recent pending sales statistics suggest continued improvement in home sales in the coming months, a renewed concern that the Federal Reserve will keep rates high has sparked a surge in rates and created a cloudier market outlook for the short term.
California’s housing market kicked off the year with a weak start: Sales of existing single-family homes remained below 250,000 for the third consecutive month and declined 45.7% from a year ago. The market might have already reached its bottom, however, as California home sales edged up for the second straight month as homebuyers took advantage of lower interest rates and lower prices in January. With pending sales remaining on a declining trend but receding at a slower pace in January, the market should see another improvement in closed sales in February. Home prices, on the other hand, continued to dip on a year-over-year basis and will drop further next month due to seasonality and higher costs of borrowing.
Inflation continues to cool at a slow pace: Prices for consumer goods & services in the U.S. eased for the seventh month in a row in January, as the rate of growth over the last 12 months dipped to 6.4% from 6.5% in December. The Consumer Price Index (CPI), however, accelerated at the fastest monthly pace since October, which is an implication that overall price level will continue to be high in the near term. With the labor market remaining strong at the start of 2023, the Fed will likely raise rates again in at least their next meeting, and mortgage rates will remain elevated for most of the year.
Mortgage rates increase as yield markets anticipate further tightening by the Fed: The bond market might have been overly enthusiastic that inflation was going away, and the economy was slowing which led to mortgage rates trending lower in January. With the latest CPI and retails sales reports painting a picture of higher-than-expected inflationary pressure and stronger-than-expected consumers demand, Treasury yields rose this week as investors reacted in anticipation of further rate hikes by the Fed. Mortgage rates climbed again for the third consecutive week as a result, with the average 30-year fixed-rate mortgage (FRM) as of February 23 jumping 18 basis points to 6.95% from the prior week.
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