October 24, 2022 – Despite slowing its upward trajectory last week, the 30-year FRM has been increasing at the fastest rate in four decades causing acute affordability challenges and forestalling many consumers’ decision to buy a house. As a result, mortgage applications fell to the lowest level in 25 years and homebuilders’ confidence dropped to half of what it was six months ago. Meanwhile, the state’s labor market showed resilience by expanding modestly in September, although it was the smallest growth in 12 months. Retail sales were flat and inflation continues to erode purchasing power, so another rate hike from the Fed is very likely.
Rising interest rates depress California home sales and prices: Following a brief sales bounce back in August, rapidly rising mortgage rates slowed California home sales in September and resumed the month-to-month declining trend that began in the spring. Existing, single-family home sales totaled 305,680 in September on a seasonally adjusted annualized rate, down 2.5% from previous month and down 30.2% a year ago. September’s statewide median home price was, $821,680 down 2.1% from August and held above last year by a slim 1.6%. With borrowing costs remaining high in the months to come, the pull-back in sales and a downward adjustment in home prices is expected to continue.
Home builders struggle with rising rates, elevated costs, and waning demand: The homebuilder sentiment index in October fell to 38, dropping 8 points from the month prior. The sharp increase in mortgage interest rates have slowed buyer traffic significantly and with high construction costs persisting, builders’ confidence in the housing market reached the lowest level since May 2020. The number of housing starts resumed their downward trend in September by falling 8.1% from the month prior and are now down 20.3% from their recent peak in April. Single-family starts fell 4.7% over the month and permits for the same fell for the 7th straight month, so we can expect further weakening in the construction of single-family homes.
Mortgage applications slow as mortgage rates approach 7%: Total volume for mortgage loan applications decreased 4.5% from the week prior continuing its four-month downward trend as demand for mortgages fades in the wake of rising interest rates. Purchase applications specifically decreased 4% from the week prior and are 38% below the same time from last year. Mortgage applications have now slid to their lowest level since 1997 as the 30-year fixed-rate mortgage (FRM) nears 7%. As of October 20, the mortgage interest rate for a 30-year FRM averaged 6.94% when only a year ago at this time it averaged 3.09%, according to Freddie-Mac.
U.S. retail sales stall as Americans face high inflation and rising interest rates: Americans’ spending at U.S. retailers was flat in September when compared to August but rose from a year ago by 8.2% despite persistent inflation. While the gains for the month were muted, they are not adjusted for inflation and thus continue to highlight that real spending across a wide range of sectors is retreating. In addition, incomes are not nearly keeping up with inflation, and Americans are increasingly tapping into their savings and opting to use credit cards to make ends meet. As long as inflation persists, interest rates will remain elevated eroding purchasing power and begin to weigh on overall economic growth.
California sees job growth, albeit at a slower pace: Despite seeing solid growth in private payrolls, the public sector posted a decline causing overall job gains to have the smallest increase since September of last year when jobs fell. This resulted in a modest overall increase of 6,500 net new jobs for the Golden State economy in September. The state’s unemployment rate fell to 3.9% during the same month, mostly as a result of a steep decline in the labor force participation for the state, but the household survey also showed household employment contracting during the same time period. The state labor market is showing resilience, but growth is decelerating as more macroeconomic challenges mount.