California Housing Market Faces Challenges Ahead of Spring Home Buying Season

The U.S. Economy Loses Momentum

Recent economic data indicates that the U.S. economy is slowing down, primarily due to the lagged effects of monetary policy tightening. Retail sales and inflation have both dropped for the second-straight month. However, prices for core goods and services remain high, which could push the Fed to hike rates one last time by another 25 basis points at their May meeting. Although consumers remain relatively pessimistic, their long-term sentiment remains stable.

Inventory Challenges Ahead of Spring Home Buying Season

According to the California Association of REALTORS®’ (C.A.R.) monthly member survey, inventory could pose a challenge ahead of the spring home buying season. The percentage of REALTORS® with listing appointments dropped for the second consecutive month. With fewer listing appointments, fewer properties are being listed for sale. Unfortunately, some of it seems to be reluctance from sellers to list.

Housing Affordability for Californians is Deteriorating

Housing affordability deteriorated in 2022 for all California ethnic home-buying groups. About one in five Californians can support the purchase of a median-priced home. By ethnic group, about one-fourth of White California households and a little over one in 10 Black and Hispanic/Latino California households could afford the same median-priced home. At the same time, 31% of Asians could buy a median-priced home. This illustrates the homeownership gap and wealth disparity for communities of color.

Consumer Prices Remain Elevated

While the March report for Consumer Price Index (C.P.I.) showed prices rose by the smallest amount in nine months, excluding food and energy (core C.P.I.), inflation remains high. The core C.P.I. has been above 5% for 16 consecutive months, more than double the Fed’s target rate. The Fed will likely enact one more rate hike at their upcoming meeting. However, many signs point to less upward pressure on consumer prices.

Retail Sales Slip Again

Consumer spending lost momentum for the first quarter, with retail sales falling for a second consecutive month in March. Even with a 1.0% month-to-month drop, spending remains nearly 2% ahead of where it was back in December and close to 3% ahead of the same month of last year. The elevated cost of borrowing is starting to weigh on consumers’ decisions to purchase big-ticket items.

Consumer Sentiment Holds Steady

The University of Michigan’s headline index measuring how Americans feel about their finances and the broader economy improved slightly from March to April. Consumers have been broadly pessimistic since last summer when the index dropped to a record low of 50, mainly due to high inflation. Despite short-term inflation expectations jumping, long-term expectations held steady.

Housing Market Analysis – April 17, 2023