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While some of the latest reports on consumer confidence and housing sentiment might have painted a more positive picture for the housing market conditions in August, recent developments in the lending environment and the financial market suggest that we could see more market uncertainty ahead of us. With interest rates rising sharply in the past couple weeks and the S&P 500 index falling nearly 9% since mid-August, the housing market will likely encounter more headwinds in the fall as the risk of recession looms large while high inflation remains a concern.
Consumer confidence hits 4-month high in August: The Conference Board's monthly snapshot of consumer attitudes rose to 103.2 from July's downwardly revised 95.3. The share of consumers that see jobs as “plentiful” fell, but so too did the share finding jobs as “hard-to-get”. The expectations component shot up almost 10 points to 75.1. While that is an improvement, it still places the measure at a point that is lower than all but three months in the past eight years. Gas prices at 4-month low might have provided some relief to consumers last month, but the decline in stock prices since mid-August could weigh on confidence in the coming month if markets continue to dip.
Housing sentiment improves as prices dip: Consumers’ optimism bounced back last month as rates declined in early August while home prices continued to moderate. Results from the C.A.R.’s latest monthly sentiment survey showed that respondents who believed it was a good time to buy a home rose month-over-month for the third straight month to 19%. As the average 30 year fixed-rate mortgage dipped below 5% in the first week of August, some buyers might have seized a rare opportunity to buy during that time window. Meanwhile, those who believed it was a good time to sell a home continued to decline to 52% and dropped sharply again from last August’s 72%. With interest rates started rising since mid-August, housing sentiment will likely reverse its direction in September. In fact, two-thirds (64%) of the consumer respondents still believed that the overall economic conditions in California would not improve in the next 12 months, and three quarters (75%) believed that interest rates would rise in the next 12 months.
Mortgage rates reach highest level in two months: Since dipping below 5% - a 4-month low - in early August, interest rates have been climbing throughout most of August with the 30-year fixed-rate mortgage (FRM) averaging 5.66% in the latest Freddie-Mac’s weekly survey. A year ago, the 30-year FRM averaged 2.87%. Higher interest rates have hurt buyer demand significantly, with purchase applications declined in eight of the last nine weeks. As sellers continue to recalibrate their pricing to accommodate lower demand, home prices will likely level off further as the market moves into the fall season.
Construction spending dips for the second consecutive month: Total construction spending declined 0.4% during July, as the drop in residential construction spending more than offset the gains by nonresidential construction. Higher mortgage rates combined with elevated construction costs have put a damper on the market – especially residential. Spending on single-family construction dropped 4% in July, as single-family starts fell to the lowest reading since June 2020 and builder confidence plunged in July. Multifamily spending also dipped 0.6% month-over-month, but still running at a $100.4 billion dollar pace in July 2022, which is close to the record high set 12 months ago. Home improvement spending, meanwhile, rose 1.5% in July, as homeowners decide to stay put instead of trading up/down. With building material prices stabilizing while interest rates remaining elevated, construction spending could dip further in coming months.
‘Goldilocks’ jobs report suggests a strong labor market: Nonfarm payroll growth tamed down in August with a still solid 315k gain, after adding more than half a million jobs in July. With the labor participation rate rising from 62.1% to 62.4% - which could be a signal that more workers are returning, the unemployment rate in August increased to 3.7%. Despite the increase in the unemployment rate, strong jobs growth continued to push average hourly earnings up from a year ago by 5.2%. The above 5% growth rate suggests that the Fed still has more work to do in the months ahead to bring inflation down. A 75-bps rate hike at the next FOMC’s meeting in September is a real possibility.
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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