September 25, 2023 – California Association of REALTORS® forecast improvement in the outlook for sales and prices at the Reimagine! Conference in Anaheim as interest rates will begin to ebb in 2024 and housing inventory and sales pick up. However, recently updated guidance shows that consumers should prepare for interest rates to remain elevated for longer than initially anticipated as the economy, and labor markets in particular, continue to outperform expectations and keep inflation above the target range. Homebuying demand, though still grappling with reduced affordability as rates remain above 7%, saw a modest increase last week, but market trends over the past 2 months suggest that buyers and sellers are beginning to negotiate more with most measures of competitiveness having eased slightly, but consistently, over the past 8 weeks.
Unemployment claims show labor market still tight: In addition to a strong jobs report for August, which showed a net increase of 23,100 new nonfarm jobs, the latest weekly data showed that Californians were filing new claims for unemployment insurance at the lowest rate since October of 2022. Last week, 35,040 new claims were filed with the state’s Employment Development Department—roughly 1,500 fewer claims than were filed the week prior, which is more than 28,000 few UI claims than were filed during the second week in January. Although tightness in the labor market has been a source of upward pressure on inflation, remaining at or near full employment has helped broader macroeconomic growth perform above expectations over the short run.
New C.A.R. forecast shows stronger sales and prices in 2024: Last week, C.A.R. released its housing market and economic forecast for 2024, which predicts a modest increase in both home sales and in home prices next year. Although the state is not expected to return to the elevated levels reached during 2021, existing single-family transactions are expected to rise to nearly 330,000 units. This would represent a 22.9% increase from a projected 266,100 units this year. Home prices, which continue to be driven higher by a dearth of available inventory, will continue to rise in 2024, with the median price expected to reach $866,300 on an annual basis—a 6.2% increase from 2023 and slightly higher than the original projection for last year. The recovery is likely to remain subdued, but both inventory and sales should pick up in the second half of the year as rates begin to dip slightly.
Mortgage applications rise slightly after 8 consecutive declines: Demand for homes continues to come in well below the 15-year highs reached over the past two years, but new mortgage purchase applications perked up slightly last week despite rates trending higher. The overall index rose 12% last week, bucking the 8-week slide that began in July. Despite this modest bump, September as a whole is coming in 12% below August and more than 25% lower than September 2023. There remains growing interest from investors, second/vacation home sales, and from international buyers, but first-time buyers remained challenged by decreasing affordability while repeat sales are locked into their current homes by low rates on their existing mortgages and an increasing number of long-time homeowners facing potential capital gains if they were to sell their existing residence.
Fed signals higher for longer strategy at latest FOMC meeting: The Federal Reserve’s Federal Open Market Committee (FOMC) met last week and voted to keep their target interest rate the same at 5.5%. Although this was the expected outcome by oddsmakers, policymakers did signal that they may have to keep rates higher for longer in order to ensure that inflation is tamed. The ‘dot plot,’ which is an estimation of where policymakers think rates need to be in order to achieve their dual mandate of full employment and price stability, showed that rates will need to remain elevated longer than was anticipated when they made their last set of projections at the end of June. Three months ago, consensus expectations amongst voting members called for a 4.5% Fed Funds Rate in 2024, which equated to a 100 basis-point reduction. The new average for 2024 of 5% means the Fed Funds Rate is currently scheduled to come down roughly half as much next year as originally signaled.
California market softens slightly ahead of winter amidst rising rates: The latest on California’s housing market shows that sales have not dipped back to the lows reached during the winter of 2022, which rates initially rose above 7%. However, transactions did dip below 260,000 units for the first time since January. Additionally, pending sales suggest a sluggish next few months as new escrows dipped by more than 23% from 2022’s relatively lackluster pace in August. In addition, competition has eased slightly as we approach the winter months as the number of homes being reduced has been rising in recent weeks while the percentage of homes selling above their listing price on the MLS has been falling. The rebalancing has been slight, with homes sold above asking price down from 52% in June to 46% last week, but it has been consistent for the past 3 months. The market remained characterized by too little inventory, but as the typical homebuying season has ebbed, homes are taking slightly longer to go pending and buyers and sellers are beginning to negotiate more.
SOURCE: https://www.car.org/marketdata/marketminute#bht.63f88d73-4416-48d3-97dc-a564a92a742e.7