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Headwinds have increased in recent weeks with persistent inflation driving interest rates higher and lend support for more hawkish Federal Reserve policy. Consumers continue to grapple with rising prices—increasingly relying on savings and credit cards to maintain current levels of spending, suggesting that the economy is vulnerable to a pullback—particularly in light of recent financial market volatility. Real estate is also beginning to exhibit more clear evidence of a shift with mortgage applications beginning to dip below pre-pandemic levels for the first time since the market went into overdrive in 2020. Active listings are sitting on the market longer and the share of homes selling over list price has been shrinking consistently since April. Add it all up and it means that we can expect a more balanced market during the second half of the year with slower price growth and less competition.
The Consumer Price Index (CPI) continues to push higher in May: The CPI rose 1.0% in May, lifting the annual rate of inflation to a fresh 40-year high of 8.6%. With little signs of any immediate relief for consumers as inflationary pressures were broad-based including everything from energy and fuel to food prices. The Fed continues to fight back with tighter policy, with a 75 basis-point rate hike this week, and with more expected increases at their upcoming sessions in July and September.
Consumer credit is up, household net worth is down: Consumer credit had yet another strong month in April rising $38.1 billion, a near-record increase bested only by the prior month's unprecedented surge. Meanwhile, household balance sheets slipped in the first quarter as household net worth declined for the first time since Q1-2020, when COVID initially struck. With inflation largely outpacing wage growth, consumers have leaned on both savings and credit cards to pay for everyday essentials and discretionary purchases. According to the New York Fed, a record 537 million credit card accounts were opened in 2022Q1.
Consumer sentiment plunges to record low amid surging inflation: According to the University of Michigan’s consumer survey preliminary readings, the index of consumer sentiment slumped 14% between May and June. Rising inflation and record gas prices helped push down the sentiment index from 58.4 in May to 50.2 in June – the lowest recorded value since the university started collecting consumer sentiment data in November 1952. The survey also revealed that consumers’ views on the current economic conditions as well as their expectations worsened – not to mention their assessment of their own personal financial situation which dropped 20%.
Mortgage applications dropped to 22-year low: With mortgage rates continuing to climb further, after a brief decline in May, the 30-year fixed-rate mortgage rate has now reached levels not seen in over a decade. As a result, mortgage demand has dropped the lowest level in 22 years. Total mortgage application volume fell 6.5% last week compared with the week prior according to the Mortgage Bankers Association’s (MBA) seasonally adjusted index. Purchase applications fell 7% compared to the week prior and were 21% lower than the same week of last year.
Housing market is getting less competitive: The evidence that buyers are struggling to grapple with the twin challenges of rising home prices and mortgage interest rates is beginning to mount. Market competitiveness in last week’s MLS data point to tapering buyer demand. As a result, the average weekly inventory of existing single-family homes has grown, and the current batch of active listings has been on the market twice as long as those homes that continue to sell. More sellers are beginning to reduce their asking prices—last week, the share of active listings with price reductions was nearly 30%, up from a trough of 14.9% toward the end of March. In fact, price reductions last week were already higher than the 2021 peak of 25.8% reached late last winter. There is still a lagged effect on closed sales, which are still benefitting from an initial surge in buyer demand as rates initially started to rise, but the active listing data suggests that close sales will begin to exhibit less competitive behavior in the coming months based on the recent experience of sellers that are currently in the market.
If you're ready to discuss today's market and whether now is a good time for you to buy or sell, give me a call at (562) 900-9430.
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