September 18, 2023 – Home sales in California had another soft month in August as interest rates surged to the highest level in 22 years late last month before calming down slightly in the past two weeks. Home prices continue to recover, nevertheless, with the California median price gaining year-over-year for the second straight month. Tight supply remained the primary factor that prevented prices from falling, and new listings have been shrinking for more than a year already. Housing shortage also has been keeping sales down and the situation may get worse before it gets better. With retail activity staying solid and core inflation not cooling fast enough, rates are not expected to retreat meaningfully in the next couple weeks. Home sales will likely have another slow month in September but could bounce back in October and November, as signs of slower economic growth in recent weeks suggest lower mortgage rates could be forthcoming in Q4 2023.
California home sales dip again as rates soar to a 22-year high: Sales of existing homes in California dipped on a year-over-year basis as costs of borrowing continued to climb while supply remained tight. The dip extended the months of annual declines to 26 in a row, and the sales pace in August reached the lowest level in seven months. Despite the continuing decline, sales remained above the recent bottom of 237,000 recorded in November of last year when mortgage rates surpassed 7% for the first time in over two decades. With rates staying elevated and above 7% in recent weeks, sales are expected to be muted in the coming months. Pending sales, in fact, declined nearly 25% in August, which suggests that closed sales in California will likely slip again in September before bouncing back in October.
Home prices continue to recover with the statewide median price gaining the most in 14 months: Home prices rose again from the year-ago level for the second straight months, with the statewide median having its biggest year-over-year gain in fourteen months. August’s median price was the highest in 15 months and was the highest since California reached its peak in May of last year. Despite the average 30-year fixed rate remaining about 200 bps above the same time last year, tight housing supply and a highly competitive housing environment continued to provide support to home prices. The share of sales with sold price above asking price, in fact, remained elevated at 47.4% and was above last year’s level by 15 percentage points. Upward pressure on home prices will ease in coming months as the market moves towards the year-end, but positive year-over-year gain should persist throughout the rest of the year as rates begin to come down in Q4 2023.
Lock-in effect keeps inventory low throughout the summer: Housing supply in California continued to decline from last year in August as mortgage rates remained elevated. Active listings at the state level have fallen from a year ago for five months in a row, and the decline in each of the last four months all registered more than 20% year-over-year. Newly added for-sale properties shrank again last month but the annual pace of decline continued to decelerate, after reaching -30.1% in April earlier this year. The statewide new active listings for existing single-family homes in August increased month-to-month by 6.1% and dropped 17.5% year-over-year. As the market enters the last quarter of the year, the number of new listings should shrink month-over-month if it follows the normal seasonal trend. The rate of decline could be reduced, however, if rates begin to moderate in the coming months.
Consumer prices rose at the fastest pace in over a year: Inflation had the largest increase since June of last year as gasoline prices jumped in August. The headline Consumer Price Index (CPI) rose 0.6% on a month-over-month basis, while the core CPI increased at a more moderate pace of 0.3% from the prior month. Despite higher-than-expected monthly gains on both indices, core inflation continued to show a marked downshift since earlier this year. Price growth excluding volatile food and energy items edged lower to 4.3% in August from 4.7% in July. The slowing trend in inflation is probably enough to convince the Fed to put a pause on rate hikes in the upcoming FOMC meeting. Several factors, however, could exacerbate inflation in coming months. Gasoline prices could be kept higher if Saudi Arabia decides to extend its cuts in oil production until the end of the year. The strike by the United Auto Workers union could tighten up auto production and push up prices on dealership lots. The Fed could still raise rates before the end of the year if any of those – or other unexpected scenarios – happens and causes inflation to flare up in the next few months.
Retail sales surpass expectation but consumers could face challenges in coming months: U.S. retail sales surprised on the upside and increased 0.6% month-over-month in August. Spending at gas stations, which surged 5.2% last month, largely boosted the overall retail sales activity, as spending on other items only increased modestly by 0.2%. Online retail sales were flat in August after surging in July due mainly to Amazon’s Prime Day promotional event. Despite a summer of robust spending, headwinds could be emerging for consumers, and the U.S. economy should begin to cool in the upcoming quarter. The resumption of student loan payments next month could pull up to $100 billion out of consumer pockets over the coming year, while a possible government shutdown could reduce economic growth by 0.15% for each week it lasted.
SOURCE: https://www.car.org/marketdata/marketminute#bht.63f88d73-4416-48d3-97dc-a564a92a742e.7