California Association of Realtors Market Minute – Week of August 7, 2024

California Association of Realtors – August 07, 2023 – Mortgage rates stay close to their recent high nearly two weeks after the Fed announced another rate hike in late July. Elevated rates have been affecting buyers and sellers’ sentiment and the market will continue to observe low sales in July and August as a result. While the labor market is easing, wages continue to grow well above pre-pandemic levels, and it will take some time before the Fed is convinced that the economy is truly cooling. As such, rates could remain elevated and volatile throughout the rest of the third quarter before gradually coming down in the winter season. With the economy slowing but showing signs of mild growth, home sales could pick up in the fourth quarter as rates begin to show a more consistent declining trend.

Slowdown in July employment could take heat off the Fed: The labor market continues to show signs of easing as nonfarm job growth recorded the second straight month of sub 200,000 payroll gain in July. The jump of 187,000 jobs in the U.S. economy last month was still a solid increase by historical standard but was down sharply from the average employment growth of about 400,000 a month in 2022. With fewer job openings and workers quitting at a slower pace, upward pressures on wages are moderating as the labor market find a better balance. The July wage growth of 4.4% from last year was down from 5.4% recorded a year earlier but remained well above the pre-pandemic level. The Fed will need more evidence to prove that the economy is cooling, but the slowdown in hiring this summer could ease pressure for the Central Bank to raise rate in its next meeting.

Home Purchase Sentiment remains low, as rates climb in recent weeks: Despite consumer confidence steadily rising in the past few months, low housing affordability and tight supply continue to take a toll on homebuyers, and the percentage of those who believe it’s a good time to buy a home dipped to the lowest in six months. High home prices and unfavorable mortgage rates remained the main contributing factors for the downbeat homebuying sentiment. Buyers’ expectation of higher home prices in the short term might also have affected their perceptions of the market, as 41% anticipated home prices to be up in the next 12 months. Those who believed it’s a good time to sell remained unchanged at 64%, which is an indication that tight supply conditions could remain the norm in the near term.

Foreign buyer residential purchases pull back in the U.S.: Higher borrowing costs and lower housing inventory continued to put a dent in international home sale transactions in the U.S. Between April 2022 and March 2023, dollar volume of existing home sales purchased by foreign buyers declined 9.6% to $53.3 billion from $59.0 billion in 2022, according to a new report from the National Association of REALTORS®. Total number of properties purchased by foreign buyers dropped 14.2% from the prior year to 84,600 units and was the fewest number of homes bought since 2009. The median price of all foreign buyer existing-home purchases was 8.3% higher than that in 2022 and was the highest ever recorded. California remained one of the top three destinations where foreign buyers purchased their properties. With market conditions expected to improve next year and international travels recovering further in coming months, foreign transactions will hopefully bounce back in 2024.

Business leaders feel more optimistic about the short-term economic outlook: The Conference Board’s CEO Confidence index, a measure on CEO’s perceptions of business and industry conditions, improved modestly in Q3 2023. While business leaders were still cautious about the future of the economy, 28% of them believed economic conditions were better when compared to six months ago, an increase from 17% in Q2 2023. More than four out of five CEO’s (84%) were still preparing for a recession over the next 12-18 months in Q3 2023, but the number was an improvement from nine out of ten (93%) recorded in Q2 2023. With the short-term outlook slightly more upbeat, 40% of respondents planned to hire more people over the next 12 months, an increase from 33% in Q2 2023. Three quarters of CEOs expected to increase wages by 3% or more, slightly below the 75% registered in the prior quarter. The tick-up in confidence of business leaders is a good sign for the economy and could help lower the odds of a recession for the U.S.

Residential continues to fuel construction spending: Overall construction spending continued to trend up in June, increasing 0.5% month-over-month and 3.5% year-over-year. Tight supply in existing housing stock continued to boost new home sales and motivated developers to build more to fill existing housing supply gaps. Residential outlay was up 0.9% in June from the prior month but remained below last year’s level by 10.3%. With interest rates expected to stay elevated in the next couple of months, single-family construction expenditures could improve further and remain solid for the rest of the year. Nonresidential spending, meanwhile, begins to flatline as credit tightens. While total nonresidential outlays bounced back from May and ticked up 0.1% over the month, latest results from the Senior Loan Officer Opinion Survey revealed tightening of standards for nonfarm nonresidential loans in Q2 2023. Higher interest rates are negatively impacting credit access and will continue to weigh on commercial development in coming months. 

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