Despite rising rates and insurance challenges, housing inventory is still the biggest obstacle to higher sales volumes.

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As expected, the Federal Reserve resumed tightening of monetary policy with another 25 basis-point increase in the Fed Funds Rate last week. Despite this, the ongoing improvement in the inflation numbers, job growth and recently released economic growth figures are a testament to the resilience of the economy in the face of uncertainty. Encouragingly, growth was broad-based with an uptick in consumer spending aided by an increase in business investment on both new productive capacity as well as new nonresidential construction. However, rates remain elevated and bond prices have been falling in the wake of the Fed’s announcement, which will continue to crimp purchasing power for home buyers. Still, the housing market in California has maintained roughly 280,000 sales for four of the past five months after having fallen to 238,000 units in November of 2022. And despite rising rates and insurance challenges, housing inventory is still the biggest obstacle to higher sales volumes.

Fed votes to raise rates as economy remains strong: Even after a better-than-expected showing on inflation in June, the Federal Open Market Committee (FOMC) met last week and voted to raise their benchmark interest rate by 25 basis-points. At the upper end of their target range of 5.5%, the Fed Funds Rate is now at its highest level in more than 22 years, and is the 11th time the Fed has raised interest rates since last year. They also indicated a willingness to raise rates in the future depending on developments in the macro environment related to jobs and economic growth. Since then, bond rates have been increasing and this has begun to translate into higher mortgage rates as well (more analysis below).

GDP data shows broad-based growth: The U.S. economy expanded at a 2.4% annualized clip during the second quarter of 2023, and unlike the first quarter, consumers got some help from business investment and new construction. In addition, the first quarter was revised upward to 2% growth after an initial estimate of just 1.8%. Below the headline numbers, the monthly data showed personal consumption resuming its upward trend with durable goods rebounding after having dipped in three of the past five months. With inflation cooling and job- and wage-growth persisting at stronger levels than initially anticipated, there is hope that the economy may avoid slipping into an official recession this year.

Consumer confidence rising as jobs and income continue to grow: Consumers have been a source of broader macroeconomic concern because Americans have spent a lot over the past two years and have used up much of their savings and are relying increasingly on credit cards to propel the economy. However, a strong labor market with jobs that are still relatively abundant combined with slowing inflation and rising wages have helped keep spending resilient. In July, consumers reported their highest level of confidence in two years. In addition, more consumers reported plans to purchase a new vehicle and purchase a home in the next 6 months, though plans for other big-ticket purchases have fallen. Despite this, more consumers are still worried about the prospects of a recession and fewer are reporting plentiful jobs and rising wages than a few months ago. Spending may still slow, but a soft landing appears more possible than it did last year.

Interest rates back on the rise after good CPI data: Although 30-year mortgage rates were down after the latest report on inflation was released two weeks ago, they have since resumed a slight upward trajectory. The latest figures from Freddie Mac averaged 6.81% last week and the latest daily data shows that current rates are slightly above 7%. In addition, 2- and 10-year bond prices have been falling and their corresponding rates have been trending upward since the Fed announced its rate hike last week. This would suggest more upward pressure on mortgage rates in coming weeks, which will continue to weigh on homebuyer demand and keep the pace of sales relatively tepid.

New home sales retreat after a solid jump in May: With existing housing inventory still depressed, many homebuyers have turned to new construction when they can find it. However, new home sales took a modest step back last month after jumping up to almost 715,000 units in May. Unfortunately, much of the recent uptick in new residential starts and permits has occurred outside California, but new housing inventory nationally is still running more than double the levels of existing housing stock, which is still plagued by the lock-in effect of low interest rates than many owners benefitted from over the preceding two years.

California market remains competitive as inventory shortage persists: Although rising rates have impacted some buyers by reducing purchasing power, California has maintained the modest gains it made after falling to levels not seen since the 2008 financial crisis late last year. Currently, housing inventory continues to drop by double-digits in terms of both new inventory hitting the MLSs as well as total homes available for sale at any given time. This, more so than higher interest rates, is the limiting factor preventing a more robust recovery in home sales.

If you have any real estate questions or would like to discuss if now is a good time to buy or sell, please feel free to contact me.

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