California Housing Market Forecast: A Gradual Momentum Shift

May 22, 2023 – The latest economic data suggests that the U.S. economy is slowly losing momentum. However, there’s no need to panic just yet. Though consumers are still spending, albeit slower, the housing and industrial sectors are stabilizing. Homebuilders’ sentiment is rising, leaving the negative territory after almost a year. This positive shift can be attributed to buyer incentives and other factors that have made selling the surplus of new homes easier. As a result, residential construction is picking up, and builders are even increasing single-family permits. While the resale market in California faced some challenges in April, with sales taking a step back despite increased competition, the overall outlook remains optimistic. The need for new listings, influenced by the ‘lock-in effect,’ has limited the existing inventory of homes for sale, driving prices higher. Additionally, it’s worth noting that California added more jobs than any other state, although the unemployment rate saw a slight increase.

Higher Mortgage Rates and Low Inventory Slow Down Home Sales

April proved to be another challenging month for home sales in California. The sales pace remained below 300,000 units for the seventh consecutive month. The number of homes sold dipped compared to last year’s previous month and the same period. The tight housing supply and elevated mortgage rates have contributed to these declines. However, there’s good news on the horizon. As more transactions opened escrow in April, May is expected to see a bounce-back in closed sales. Market competition continues to intensify, putting upward pressure on home prices. The statewide median price has climbed back above $800,000 for the first time in six months and is projected to increase further in the upcoming months as we enter the typical summer homebuying season.

Housing Affordability Shows Improvement

Great news for prospective homebuyers! Housing affordability in California saw a positive trend in the first quarter of 2023. The statewide index for existing single-family homes improved to 20%, the highest in the past four quarters. This improvement can be attributed to slightly lower mortgage rates and more affordable prices. However, it’s important to note that mortgage interest rates were still significantly higher than a year ago.

Consequently, the state’s housing affordability index (HAI) remained lower than the first quarter of 2022. While the monthly mortgage payment for a median-priced home decreased compared to the previous quarter, it surged by 19.2% from last year due to the increase in effective mortgage rates. Despite these challenges, housing affordability will remain a key concern for homebuyers in the coming months.

Housing Starts on the Rise

The home building sector is showing signs of improvement. Total housing starts increased by 2.2% to a pace of 1.4 million units in April. Both single-family and multifamily starts saw solid growth, thanks to favorable weather conditions and easier access to building materials. Although housing starts were revised downward for previous months, this year’s overall trend indicates an improvement in residential construction. Single-family construction, in particular, is rebounding as permits for single-family homes have increased for the third consecutive month. Builders are gaining confidence in the market, reflected in their plans for future construction. Rate buy-downs, price discounts, and other incentives, coupled with low resale inventory, have boosted sales of new homes.

Consumer Spending Holds Steady

While some indications indicate that consumer spending may be losing momentum, it’s still ongoing. Retail sales rose by 0.4% in April, with the control group measure showing its second-largest gain in seven months. This suggests that consumer spending kicked off the quarter on the right foot. However, when adjusted for inflation, retail sales decreased by 0.2%, marking the third consecutive decline in the past six months. Despite this, the strong job market and steady income gains support household consumption, preventing a significant slowdown in retail sales. It’s important to note that inflation remains elevated, and with tightening credit conditions, decreasing excess savings, and a downturn in the labor market, consumers may find it challenging to sustain their current spending levels in the months ahead.

California’s Job Market Sees Acceleration

Good news on the job front! California’s hiring experienced a boost in April, with the state adding a net total of 67,000 jobs. The most significant expansion since January indicates a healthy job market. The healthcare and social assistance sectors saw the most significant gains in employment, although the leisure and hospitality industry also experienced substantial growth compared to previous months. Despite the overall positive payroll gains, California was the only state in the nation to see a slight increase in the unemployment rate. In April, the jobless rate reached 4.5%, the highest since February 2022. While there’s room for improvement in unemployment, the job market remains robust in the Golden State.

Conclusion

In summary, the California housing market faced some challenges in April, with low inventory and higher mortgage rates affecting home sales. However, signs of improvement are on the horizon, as closed sales are expected to bounce back in May. Housing affordability saw a positive shift at the beginning of the year, although rates remain higher than the previous year. Housing construction is rising, and builders are gaining confidence in the market, leading to increased permits for single-family homes. Consumer spending remains steady, supported by a strong job market and income gains, although inflation and other factors may pose challenges in the future. California’s economy continues to show resilience, with job growth outpacing other states. While there are hurdles to overcome, the relaxed atmosphere and the state’s natural appeal make it an exciting and dynamic place to navigate the real estate market.