California Housing Market Analysis – Week Ending April 1, 2023

The current state of the economy is showing signs of resilience despite a recent slowdown in growth. While consumer views on their present situation have taken a step back, their outlook continues to improve. This improvement can be attributed to the strong labor market, which pushes real wages higher and prevents the economy from falling behind. However, actual spending is losing momentum, and demand may soon begin to decline, leading to a correction in the economy.

In the housing market, the growth of new listings has been shrinking, with sellers increasingly holding off. New listings dropped by nearly half in March compared to the same month last year. This trend is typically reversed at the end of the first quarter to begin the spring home-buying season. Still, new listings across all regions and price ranges have been slowing significantly since late last year. Nearly two-fifths of REALTORS® have reported that clients are holding back from selling. This reluctance to sell can be attributed to mortgage interest rates, which remain nearly twice as high as last year’s, causing many sellers to hold onto their low-interest rates that they locked in before the Fed’s aggressive rate hikes that began in early 2022.

In contrast, mortgage application volume has improved for the fourth consecutive week. According to the Mortgage Bankers Association’s (MBA) Market Composite Index, mortgage application volume increased 2.9% on a seasonally adjusted basis and 3.0% unadjusted during the week ended March 24, compared to the week ended March 17. Applications for home purchases and refinancing rose for the fourth time as mortgage rates remained low relative to a few weeks before the bank failure fallout. As of March 30, the 30-year fixed-rate mortgage (FRM) averaged 6.32% – the lowest in six weeks. With home price growth slowing and rates declining in recent weeks, buyers’ purchasing power should continue to improve. It will likely bring more buyers back into the market. Shrinking new inventory, however, will continue to be challenging as the spring home-buying season begins.

Despite the recent financial turmoil caused by bank failures, consumer confidence has edged higher in March. The Conference Board’s Consumer Confidence Index rose modestly to 104.2. While the component measuring consumers’ present situation slid back to where it was in January, roughly the midpoint of its range for the last 18 months, a slightly more optimistic view of the future, combined with favorable labor market conditions, was enough to give overall confidence a nudge in the right direction.

Consumer spending remains solid, although it is losing momentum. After strong real spending growth in January, consumer spending slowed again, posting a scant increase of 0.1% in February. Actual personal consumer spending (PCE) has contracted in three of the last four months. The surge in January could lead to uncomfortably high Q1 PCE growth, potentially resulting in the Fed hiking rates at their next meeting. Meanwhile, real disposable income continued to rise for the eighth consecutive month, increasing by 0.2% in February. This earnings growth provides consumers with a more sustainable source of spending power as their excess savings drain and access to credit diminishes.

Migration and growth patterns edge closer to pre-pandemic levels: New data published by the Census Bureau suggests a slowdown in outmigration for many largest counties in the nation in 2022 after experiencing noticeable declines in population in 2021. Los Angeles County – the most populous county in the United States – lost more residents than any other county, with 143,000 leaving in 2022. The drop was less drastic than 2021’s almost 195,000 decline. A similar pattern was observed in many metropolitan South and West counties. Many impacts experienced during the pandemic either reverted to near pre-pandemic levels or fully recovered. These population shifts were partly attributed to net international migration, which continued to improve throughout 2022 after declining sharply during the pandemic.

Housing Market Analysis – April, 2023