December 19, 2022 – Based on the latest economic news, all signs point to a bumpy start of the year in 2023. Despite having improvements in inflation, a slight increase in consumer sentiment and healthy unemployment numbers, the housing market and the economy overall at the state and national level still face many challenges. The Federal Reserve raised rates again last week but the recent reprieve on mortgage rates may encourage some buyers to take advantage of the recent shift in the market. However, consumers are still grappling with rising prices and suggest that slower economic growth could be ahead.

Housing demand in California falls as high interest rates continue to crunch affordability: Sales of existing single-family homes dropped to a seasonal adjusted annualized rate of 237,740 in November – the lowest level since the Great Recession. The statewide median price dipped year-over-year for the first time in 30 months as less competition relieved upward pressure on prices. Mortgage rates at the highest level in 20 years was the primary reason for the downward trend in sales and price, but deteriorating sentiment played a role as well. The market will likely get slightly worse before it starts getting better, but pending sales indicate that the pace of declines should begin moderating in the coming months as the market nears bottom.

Inflation continues downward trend, but prices remain elevated: The index tracking consumer prices, inched up 0.1% in November from the previous month, and increased 7.1% from a year ago. While the headline inflation number remains well above the Fed’s target of 2% for a healthy inflation level, it is the lowest it’s been in 12 months. Excluding the more volatile food and energy prices, “core” inflation still advanced 0.2% from the month prior and 6% from a year ago, but it also showed signs of cooling.  The pace of inflation is expected to continue slowing over the next few months, but the 5% pace of wage growth is likely to keep the Fed active in its fight against inflation.

Fed scales back its rate hike but states the fight against inflation is far from over: The Fed announced a 50-basis point rate hike, pushing the borrowing rate to a targeted range between 4.25% and 4.5%, the highest level in 15 years. Despite CPI continuing to improve slightly, the FOMC indicated that further rate hikes are still in sight at similar or slower pace until enough evidence shows that inflation is on a sustained downward path.

Consumers pulled back on spending even as prices moderated: Retail sales for November, according to the Commerce department, declined 0.6% ahead of the holidays. The pullback was widespread across categories despite inflation easing slightly for the same month. Americans have been struggling for nearly two years with higher prices which has eroded their purchasing power and pushed them to rely much more on their savings or swipe their credit cards. The savings rate is near all-time lows and revolving credit card balances are up 15% from a year ago. Although nominal sales remain up on an annual basis, inflation-adjusted spending has been flat or falling for several months.

Consumer sentiment improves slightly: The University of Michigan consumer sentiment index rose in early December to 59.1 with consumers feeling better about current conditions and less pessimistic on their expectations for the future. Respondents expect an increase in unemployment over the next 12-months, but an increasing number of consumers also expect higher income and lower interest rates. On balance, consumers are slightly more optimistic, but do not anticipate significant improvements next year.

California unemployment rate inched up but remains low: The unemployment rate in California last month ticked up to 4.1% as household employment levels declined over 40,000 for the second month in a row, according to the survey of households. It was one of 26 states to have recorded an increase in unemployment rate for the month. The parallel survey of employers showed that California was also one of the 43 states which posted an increase in payrolls and was the third highest in absolute job gains. Despite the divergence between the two surveys, the net job gain from the employer survey was at a slower pace than October, so both reports point to a cooling labor market.