February 13, 2023 – Last week, new jobless claims had their first upward movement in 6 weeks, though still low by historical standards, pointing to a labor market which remains on solid ground. Consumers overall sentiment is on the mend and, along with that, towards home purchasing attitudes. Lastly, while affordability in California slid in Q4-2022, home prices are expected to soften further in the first quarter of this year and mortgage rates appear to be leveling off, so housing affordability should improve in the first half of 2023.
California’s housing affordability dampens amidst high interest rates: Despite a dip in the quarterly median home price for the first time in eleven years, affordability slipped from the previous quarter to end the year near the lowest in 15 years. Only 17% of households in California could afford to purchase the $790,020 median-priced home in the fourth quarter of 2022. A minimum annual income of $201,200 was required to make the monthly payment of $5,030, including principal, interest, taxes, and insurance (PITI) on a 30-year fixed-rate mortgage at 6.80%. This was the first time in recorded history for the Golden State where the PITI on a typical home surpassed $5,000 and the minimum annual income required exceeded $200,000.
Home purchase sentiment remains subdued by historical standards: With affordability near record lows, consumers aren’t as upbeat about the housing market as they were in previous years. In fact, despite inching up for the third consecutive month in January, Fannie Mae’s Home Purchase Sentiment Index® (HPSI) remains well below its pre-pandemic highs. Three of the index’s six components increased month over month, including those associated with home-selling conditions, home price outlook, and household income which pushed up the overall index by 0.6 points to 61.6. Year-over-year, the full index is down 10.2 points. According to Fannie Mae’s HPSI, only 17% of consumers believe it’s a good time to buy, reflecting today’s unaffordable conditions released last week by C.A.R.
Mortgage rates inch up slightly – volatility comes with uncertainty: While the 30-year fixed-rate mortgage had been on a downward trend since it peaked just over 7% in late October and early November, recent uncertainty on the Fed’s next move following a stronger than expected January Jobs reports, has once again brought volatility to the bond market and, consequently, to mortgage interest rates. The markets reacted last week in anticipation of the Fed’s next move, as the latest jobs report suggests a possible flare up in inflationary pressure. According to Freddie Mac’s weekly Primary Mortgage Market Survey®(PMMS®) the 30-year fixed-rate mortgage (FRM) averaged 6.12% as of February 9. This was up from the week prior when it averaged 6.09% and remains well above a year ago when it averaged 3.69%.
Consumer sentiment on the mend but remains historically weak: A resilient labor market along with slowing inflation have contributed to consumers feeling a little more optimistic in early February as the Consumer Sentiment Index inched up to 66.4. However, despite recent improvements, sentiment remains near historically low levels. The recent rise in consumers’ overall sentiment was attributed to an improvement in current conditions, which jumped 4.2 points and pushed the index to 72.6 – the highest in over a year. Despite this, consumers remain wary about the near-future with expectations about inflation over the next year reversing it recent string of declines – rising to 4.2% from 3.9% the month prior. The longer-term expectations (5-10 years ahead) held firm at 2.9% and remained within the Fed’s range.
Weekly jobless claims edge up, but labor market remains solid: Initial claims for state-offered unemployment benefits – an early indication of unemployment – rose 13,000 to a seasonally adjusted 196,000 for the week ending February 4. Despite this being the first increase in initial claims in six weeks, the four-week average actually fell 2,500 to 189,250 – the lowest since late April. The jobs market has remained resilient despite growing economic headwinds from the Federal Reserve’s interest rate hikes. While a solid labor market will likely keep the U.S. central policy on its monetary policy tightening path, it suggests that the U.S. economy is holding up better than many forecasters had expected.