Mortgage rates continue their upward climb as daily rates top 8% several times over the past week. This comes as the bond market continues to price in “higher-for-longer” and rates for 10-year notes are quickly approaching 5% after remaining relatively flat through the first half of this year. Despite this, consumers remain a driving force of growth in the U.S. economy and this was reflected in last month’s labor market statistics for California that kept leisure and hospitality at the fore. Housing supply remains depressed and this is behind slower home sales in California, but despite the impacts to buyer demand as rates increase, home prices logged their third consecutive year-to-year increase last month.
Benefits of homeownership still alive and well: The Federal Reserve released its 2022 Survey of Consumer Finance report last week, which showed that homeowners continue to account for the majority of wealth accumulation in the U.S. Last year, the typical, inflation adjusted, net worth for a U.S. household rose to $192,900. However, broken down by housing tenure shows that homeowner wealth reached a median of $396,200 last year, while median net worth for renters was just $10,400. This is only $1,000 higher than the previous all-time high set back in 1995 and demonstrates that renting continues to disappoint when it comes to generating wealth and highlights why owning a home is a wise long-term financial move.
Consumers remain undaunted by rates or debt levels: Despite the fact that credit card debt has risen by nearly $150 billion compared with pre-pandemic levels, retail sales rose again in September as consumers continue their assault on the services sector. Although some of this credit card debt has begun to grow delinquent, spending at bars, hotels, and restaurants remain strong. Even after netting out above-average inflation levels for the past year, real retail sales remain more than 10% above spending levels from January 2020.Given that consumers represent nearly 70% of U.S. gross domestic product (GDP), this suggests that 3rd quarter economic growth could come in much stronger than originally forecast, which will prevent the Federal Reserve from considering any potential rate cuts until next year.
Housing starts up for now, but not many single-family homes: Housing inventory remains the limiting factor on rebounding home sales, which is why last week’s updated housing starts for September were a source of hope against a backdrop of otherwise challenging market news. The number of new residential housing starts rose to a 1.4 million unit pace last month. This is still likely below the level needed to meet demand given the lackluster numbers of the previous two years, but encouraging that new projects are moving forward despite the recent increase in mortgage rates. However, much of the activity was concentrated in multi-family building and the sustainability of the uptick has yet to be proven.
Rates continue to rise as bond market prices in “Higher for longer”: Daily averages for 30-year, fixed-rate mortgages have broken the 8% threshold twice over the past week as the bond market digests and accepts the Federal Reserve’s promise to keep rates higher for longer than originally anticipated. The current rate on a 10-year Treasury is quickly approaching 5% despite recent comments from the Fed Chairman that they are unlikely to raise rates before the end of the year and a flight to the safe haven of U.S. Treasuries as the conflict in the Middle East threatens to impact oil supplies. Although this means that the yield curve, which measures the spread between short- and long-term Treasuries and is typically a consistent indicator of future recession, is less inverted, it has come at the cost of higher mortgage rates that are increasingly likely to remain elevated through the end of the year.
California market trends down as rates rise: California’s housing inventory remains very tight, even by the standards of the past few years. However, the recent rise in rates in also having a more pronounced effect on homebuyer demand than it has up to this point in the recovery. Home sales trended back down to roughly 240,000 units last month. This is still slightly above the low-point reached back in November 2022, when sales fell to 235,000 units, but underscores that the return to more ‘normal’ levels of transactions will be a gradual process of fits and starts. Home prices are still on the uptick, and despite dipping slightly from August for seasonal reasons, the median closed price of an existing single-family home in California rose for its 3rd consecutive month on a year to year basis.
Job market remains strong, but unemployment rises: California added nearly 9,000 net new jobs in September as gains in tourism, bars/restaurants, entertainment, and healthcare offset declines in manufacturing, tech, and professional jobs. However, the unemployment rate rose to 4.7% as the number of unemployed workers rose above 900,000 for the first time in over 18 months. Weaker unemployment data suggests that the jobs numbers may not be as strong as is currently estimated—a theory supported by official, though 9-months lagged, data from the state on payments into the unemployment insurance system that suggests things may be weaker than headline numbers suggest.
The sharp increase in mortgage rates in the past month was due primarily to the Fed’s announcement at their latest FOMC meeting that rates will be kept “higher for longer”, which dashed market participants’ hope for more significant rate cuts in 2024. Despite the initial increase, rates have shown improvements last week as several Fed’s speakers softened their tones and suggested that the Central Bank could be done with rate hikes. Housing sentiment, nevertheless, declined further last month as consumers pointed to mortgage rates as their primary challenges to housing affordability. With costs of borrowing staying high and rates likely to fluctuate in the next couple of weeks, home sales will remain soft in the near term.
Core inflation continues to moderate but at a slow pace: Consumer prices rose more than expected with the headline inflation increasing 0.4% month-over-month and 3.7% year-over- year in September. Energy prices, while moderated last month, continued to put upward pressure on overall inflation. The retreat in retail price at the gas pump since the end of September, however, will provide some relief to consumers in the near term and should help ease the inflationary pressure in October. The Core Consumer Price Index (core CPI) – inflation excluding food and energy – continued to fall in September, with the index rising 0.3% from the prior month and was up 4.1% from a year ago. The core index in September suggests that inflation remains on a downward trend, but the improvement made has been slow and will likely remain slow in the next couple of months. While the latest CPI report provides some insights on the recent progress on inflation, the Fed will be looking for more evidence in the next few weeks to prove that the economy is indeed slowing before putting the rate-hike movement on hold in their November meeting.
Mortgage rates back to recent highs after making progress last week: Mortgage rates dropped sharply early last week following the outbreak of the Israel-Hamas conflict. Additionally, comments from several Fed speakers made last week also suggested that the Fed could be done with rate hikes as most of the work on inflation has already been done. The average 30-year fixed rate mortgage (FRM) went down 15 bps by Friday when compared to the Friday of the prior week, according to Mortgage News Daily. The improvement made on rates, however, was almost completely erased at the start of the current week, as yields surged on Monday. With the yield on the 10-year Treasury rising 8 basis points (bps) on Monday and the 2-year Treasury yield traded almost 5bps higher, the average 30-year FRM increased 14 bps on the first day of the week. As investors continue to assess the economic outlook and the uncertainty brought on by the geopolitical tension in the Middle East, more volatility on rates should be expected in the short term.
Elevated mortgage rates keep housing sentiment at a low level: Housing sentiment decreased further in September as rates climbed to a 23-year high, reported by Fannie Mae in their latest national housing survey. Those who believed that it is a good time to buy dipped to 16%, reaching the all-time survey low set last year. With rates rising more than 50 bps since a month ago and having been trending up for nearly six months, consumers remained downbeat about home buying conditions with only 17% expected mortgage rates to decline in the next 12 months. High mortgage rates, in fact, have surpassed high home prices as the top reason why consumers think it is a bad time to buy a home. On the sell side, while consumers were more upbeat with 63% reported that it is a good time to sell, it was, nevertheless, still a decline of three percentage points compared to the prior month.
CEO confidence dips as future expectations become more pessimistic: Business executives remained cautious about the economic outlook at the beginning of Q4, as nearly half (47%) of them expected general economic conditions to get worse over the next six months. Compared to the prior quarter, CEOs were less enthusiastic about the economy ahead, as only 39% in the third quarter thought the same way. Political uncertainty, geopolitical instability, inflation stickiness, and higher costs of borrowing are just a few concerns that might have resulted in the decline in business leaders’ optimism. Despite the slight decline in the CEOs confidence, 38% of CEOs still expected to expand their workforce over the next 12 months, an inch down from 40% in Q3. Over a quarter (27%) of them expect to increase their capital budgets, up from 22% in the last quarter. The majority of CEOs continued to expect a recession in the next 12-18 months, but that consensus declined noticeably over the course of 2023. In Q4, less than three-quarters (72%) of them believed that there will be a recession in the next 12-18 months, a drop from 93% at the start of the year.
Share of first-time buyers bounced back after two years of decline: The share of homes being sold to first-time buyers increased from 33.7% in 2022 to 36.2% in 2023, according to the California Association of Realtors 2023 Housing Market Survey. The increase in the first-time buyer share this year, however, was not attributable to housing being more affordable. Rather, the rise in share was due primarily to fewer repeat buyers entering the market as many of them were also homeowners who were not willingly to put their house up on the market for sale due to the lock-in effect.
Buyers and sellers’ sentiments remained virtually unchanged in August as housing market participants wait for more signals on what the Fed’s next move will be in the upcoming FOMC meeting. With the economy looking stronger than what was anticipated six months ago, interest rates will remain elevated for a little longer. Consumers could be tapped out, however, as costs of borrowing continue to rise, and their financial conditions begin to tighten up. As such, the economy will likely show more signs of slowing later this year and the Central Bank will have no choice but to cut rates starting in the first quarter of 2024. Mortgage rates will decline starting in the fourth quarter of this year and will further improve next year. The decline will likely be gradual though.
Lack of affordability and tight supply keep homebuyer confidence at low level: Housing sentiment stalled by unusual market dynamics in August as rates remained elevated, reported by Fannie Mae in their latest national housing survey. Those who believed that it is a good time to buy remained at 18%, the lowest level the market has seen in at least the last three years. With rates rising throughout most of last month, consumers continued to feel pessimistic about home buying conditions and they did not expect things to turn around soon. In fact, only less than two out of ten (18%) expected mortgage rates to decline in the next 12 months. On the sell side, however, consumers were more upbeat with 66% of them reported that it is a good time to sell. Consumers have become more positive about home selling since earlier this year as home prices continued to stabilize and housing supply remained tight.
Share of homes with negative equity remains low in California: Home equity dropped on a year-over-year basis in the second quarter of 2023 but improved on a quarterly basis from the first quarter of 2023, reported by CoreLogic’s latest Homeowner Equity Insights report. At the national level, homeowners with mortgages in aggregate have seen a drop in equity by a total of $287 billion, or a loss of 1.7% year-over-year, from Q2 2022. On average, U.S. homeowners with mortgages lost $8,300 in equity last quarter compared to a year ago but gained an average of $13,900 from the Q1 2023 when home prices in general bottomed out. Roughly 2% of all mortgaged properties, or 1.1 million homes, were underwater or had negative equity last quarter. While the number of under-watered homes increased 4% from a year ago, the share of residential properties with negative equity was still significantly below the peak of 26% observed in Q4 2009. California was one of the 16 states that posted an annual equity loss in Q2 2023, with the average homeowner losing $48,000 in Q2 2023. The state, however, had a share of homes with negative equity at 0.8%, which was the lowest of all states reported by CoreLogic.
Soft landing odds improve… for now: The resilience of the U.S. economy continues to surprise economists to the upside and the chance of falling into a recession has been lowered again. The probability of the U.S. entering a recession in the next 12 months has been reduced to 15% from an earlier 20%, according to Goldman Sachs’ latest forecast outlook. The investment bank expected the Fed to pause rate hike in September and believed that a “very gradual” cuts of 25 bps per quarter will begin in Q2 2024. Goldman Sachs also predicted that the slowdown in economic activity resulting from monetary policy tightening will slowly diminish and eventually become a non-factor by early 2024. Real disposable income will pick back up next year as solid job growth continues.
Households not as optimistic about their financial conditions as before: Despite a solid job growth and decent economic conditions in the first half of the year, consumers have become less confident about their financial situations as the labor market began to slow while costs of borrowing remained high. The slowdown in wage growth could be a contributing factor to the decrease in optimism, as the expected growth rate in household income dipped 0.3% to 2.9% in August, reaching the lowest level since July 2021. Interest rates rising sharply between mid-July to mid-August might also have resulted in the deterioration of perception of credit access in August from a year ago, as nearly 60% of households reported that it is harder to obtain credit than the same time last year when the peak of the series was recorded. Households were also less positive about their future financial situation in August. Less than a quarter (23.8%) of households believed that they will be better off one year from now, the lowest level recorded since October 2022.
New supply continues to soften rent growth: Long gone is the day when the market had double-digit rent growth, and apartment rents could see year-over-year declines in coming months. Rents at the national level in August only increased 0.28% from 12 months ago, according to real estate tech platform RealPage. Other than a brief drop during the Covid lockdown, rents have not experienced a decline on an annual basis in over a decade. A surge in apartment supply is the primary factor for the recent slowdown in growth. Over a million new units have been built in the past three years and more than 460,000 new units – a 50-year high – are expected to be completed this year alone. With supply remaining high at the national level through next year, rent growth could remain low through 2025, but a bounce-back is likely in the year after as far less supply is expected in 2026.
Government Affairs Mountain View Moves Forward with Revenue Measures At a recent study session, the Mountain View City Council agreed that while the budget is secure, the city lacks funding to address critical infrastructure needs. One of those critical needs is the $160 million estimated for a new public safety building. There are also needs for fire services, park space, affordable housing, and climate change initiatives. These were all presented in the same study session that can be seen HERE.
City staff presented several options for revenues, all looking to generate around $5 million per year. This generally was agreed upon to take the form of a general tax, which only requires 50%+ approval to pass. However, they are still considering whether or not this should be a transient occupancy tax (TOT or hotel), a property transfer tax, a utility users tax, or a sales tax. It appears the primary focus now would be evaluating the feasibility of a TOT which hasn’t been updated since 1991 and still sits at 10%. Some neighboring cities are as high as 15%.
Real estate taxes received healthy discussion, but the council was split on a transfer tax increase. Mountain View already has one of the higher rates, with $3.30 being charged per $1,000 of value. A tiered approach was discussed, similar to San Jose, but received tepid support. Another suggestion was a parcel tax on commercial and industrial properties. The only formal action was to hire a consultant to conduct polling and organize community outreach around the various proposals.
•
•
•
Selena Young
Realtor | Coldwell Banker Realty
DRE# 02073411
Rates have risen sharply in the past few weeks, but the housing market has weathered this rise relatively well. Although the primary measures of mortgage demand show that homebuyers remain affected by higher rates, the gap between 2022 and 2023 levels has yet to widen noticeably. In addition, rates have begun to inch down slightly since the gathering of economists in Jackson Hole last week where the Federal Reserve Chairman seemed more cautious about raising rates at the upcoming FOMC meeting in September. Despite this optimistic news for financial markets, consumers remain a primary area of risk for the macroeconomy as delinquencies on various forms of debt have begun to rise, taking some steam out of our primary engine of growth thus far. While many have begun to celebrate the possible achievement of the proverbial ‘soft landing,’ the leading economic index suggests that we may not be out of the woods quite yet.
Rates inch down from 20+ year highs: After rising to almost 7.5% in the previous few weeks, daily tracking shows that mortgage rates have come down roughly 10 basis points since the Chairman of the Federal Reserve spoke in Jackson Hole where he indicated that the committee will take a data driven approach and be flexible in the months ahead. Some interpreted these comments to mean that another rate hike in September may not be in the cards. Since then, 2-year Treasury rates have inched down slightly, although 10-year notes have come down far less. This means that the yield curve, a reliable correlate with future recessions, remains inverted and suggests that we may still face headwinds next year. However, it also suggests that rates could begin to dip again if 10-year rates start to follow shorter-term yields down.
Shrinking money supply could help with inflation: Although the economy is not yet fully out of the woods on its battle to reign in inflation, recent data from the Federal Reserve shows that M2, a primary indicator of liquid money supply currently in circulation, has now been dropping for the past 8 months consecutively as the FOMC tightens monetary policy and raised its benchmark interest rate. This should have the effect of curtailing some demand for products and services and helping to alleviate the shortage of workers currently needed to fill open positions, which, in turn, would help to reduce upward pressure on inflation in the months ahead.
Credit card and auto loan delinquency rates are on the upswing: As credit card balances rose above $1 trillion for the first time in the second quarter in the U.S., more Americans are falling behind on their payments. According to data from the New York Fed, new credit card delinquency rate hit 7.2% in Q223, while the rate of new auto loan delinquencies reached 7.3% in the same time period. Both rates surpassed pre-pandemic levels in the latest quarter. With student loan payment set to restart in October, consumers could be stretched even thinner financially in coming months, and a slow down in retail spending in the last quarter of this year should be expected.
Rent growth continues to slow: U.S. single-family rent growth continued to rise but at a more moderate pace. The latest Single-Family Rent Index released by CoreLogic shows that rent growth eased for the 14th consecutive month in June and registered a year-over-year gain of 3.3%. The increase was the lowest since autumn 2020. The monthly growth rate of 1.1% recorded in June was consistent with the pre-pandemic average of 1%, which could be an indication that the measure is returning back to its long-term normal. Chicago had the highest annual increase in single-family rent growth in June at 6.6%, while Los Angeles/Long Beach/Glendale posted a 2.7% and San Diego/Carlsbad recorded a 4.3%.
Mortgage demand peaks in 2023 at half 2022 levels: Although mortgage demand saw its typical bounce during the spring homebuying season, the monthly index of new purchase applications peaked at roughly 200 in May of this year compared with a peak of roughly 300 last year. This is consistent with the volume of sales transactions, although California bounced back to slightly more than half of the roughly 510,000 units that it hit at the end of 2021. The effect of rising interest rates has sidelined some potential buyers as the effects of rising prices have compounded the reduced purchasing power.
Existing home sales fall, while new home sales rise and capture additional market share: As noted in previous editions of this report, new home sales have been steadily gaining market share as existing homes suffer from a lack of inventory that has prevented transactions from rising. Nationwide, resale transactions fell to 4.1 million units on an annualized basis last month, which is a 2.2% decline from June. At the same time, new home sales rose 4.4% bringing the share of new to all single-family homes sold to nearly 16%. Builders have been increasingly relying on incentives like rate buy-downs and a relatively less depressed stock of new home inventory to achieve gains in the level and share of homes sold as existing homeowners remain reluctant to sell their properties and abandon their historically-low interest rates. Even in California, where existing inventory is up slightly for July, the current unsold inventory index remains at 2.5 months of supply, which means that without any new inventory, California will be out of homes to sell before we enter winter.
As always, as news headlines raise questions, I am happy to provide you with real-time information and answer all of your real estate questions. Feel free to contact me today!
•
•
•
Selena Young | Realtor
DRE# 02073411
Coldwell Banker Realty
Housing affordability remained an issue in the second quarter and the problem will persist in the second half of the year as rates continue to stay high. Despite inflation easing closer to 3% in the last couple months, rates have been climbing further in the last two weeks as food and energy prices are expected to increase in coming months. With inflation not likely to come down meaningfully in August and September, there is a chance that the Fed could raise its policy rate one more time before the end of the year. As such, mortgage rates could remain elevated for a longer period than what the market previously anticipated.
Housing affordability lowest since 2007 as rates remain elevated: C.A.R. just released its second quarter Housing Affordability Index and the share of households in California that can afford to buy a typical single-family home dropped to 16%, the lowest since Q3 ’07. Higher mortgage rates continued to push cost of borrowing to an all-time high, resulting in an increase of 8.1% in mortgage payment from Q1 ’23 and a 5.3% jump from Q2 ’22. A minimum qualifying income of $208,000 was required to make the monthly payment of $5,200 for a median-priced home, at the prevailing 30-year fixed-rate mortgage of 6.61% in the state. The minimum income required in Q2 ’23 was a new record high and was the second time in the last three quarters that it exceeded $200,000. With interest rates near the highest level in the past 17 years and expected to remain elevated for the remainder of the year, housing affordability will remain a challenge for many homebuyers in the coming quarters.
July inflation continues to moderate but may inch up August: Despite headline inflation rising annually from 3% in June to 3.2% in July, the monthly increase of 0.2% last month continued to moderate from the 0.5% average gain in 2022. Meanwhile, core inflation continued to decline gradually on a year-over-year basis from 4.8% in June to 4.7% in July, and the 3-month annualized average of 3.1% was the slowest pace since September 2021. Prices of housing remained up but cooled from early 2023, while used cars/trucks softened further in July and airline fares dropped sharply on a year-over-year basis. The downward trend in the headline inflation figure, however, could reverse in coming months as gasoline began to head up again while producer prices for food also climbed up in July. Geopolitical tension and weather-related factors could continue to put upward pressure on food and energy and may disrupt the declining path in inflation in the next few months.
Mortgage rates reach highest level since November: Interest rates have been steadily rising since early April and just hit the highest mark in nine months. The average 30 year fixed-rate mortgage rose 5bps and reached 7.24% on August 14, 2023, as reported by Mortgage News Daily. Cooler inflation in July was supposed to minimize the odds of the Fed’s next rate hike and reverse the rising trend in rates observed in the past few months. Instead, the upward momentum continued shortly after the release of the consumer price index and rates kept rising after the release of the producer price index last week. Elevated oil and food prices in the short term and the increasing odds of achieving an economic soft-landing in 2024 might have suggested to many in the market that the Fed could hold its policy rate steady for a little longer. As such, rates continue to climb in the past couple of weeks despite cooling trend in inflation and will likely stay elevated through the rest of the third quarter until the Fed sends a more decisive message to the market about its next rate move.
•
•
•
Selena Young | Realtor
DRE#02073411
Coldwell Banker Realty
The Quarterly Report offers insight into residential real estate sales activity and regional trends.
If you are interested in receiving more information on your local market, please let me know. I would be happy to send you those reports! •
•
•
Selena Young | Realtor
DRE# 02073411
Coldwell Banker Realty
Buyer Co-Represented with @realtortowatch
What a whirlwind! Jasmine and I got a call from a friend of ours, letting us know that their cousin had just toured a property in Capitola and was ready to make an offer but needed an agent. Within a matter of minutes we were on the phone with our future client walking him through the offer process and pulling disclosures.
In another couple of days we had submitted our offer and negotiations began. We were competing against another offer, coming in around the same price. But our consistent communication with the listing agent was setting us apart. On top of that, we were given the opportunity to write a letter to the seller explaining why our client was interested in this particular property.
Not many sellers are willing to accept them anymore, due to potential issues with fair housing and discrimination issues, so we were very grateful the seller was open to reading ours. Our client explained that, that particular property was located steps away from one of his closest relatives and how wonderful it would be to live nearby. Due our letter and proactive approach, our offer was accepted with a loan and investigation contingency!
Not only was this a quick negotiation, but this was also our first crypto client as well! (Thus the loan contingency.) We had some concern at first, but working with a lender you trust and who has a proven track record puts one’s mind at ease. So I would like to thank @maxbottaro1 and his team at PNC for ensuring the smooth and timely closing on this sale.
Have questions about the shifting market? Jasmine and I are here to help. Don’t hesitate to reach out!
•
•
•
Selena Young
Realtor | Coldwell Banker Realty
DRE# 02073411
Facebook
X
Pinterest
Copy Link