California Housing Market: Resilience Amid Rising Rates
July 11, 2023 – Last week, the California housing market made headlines as it continued to thrive despite various challenges. The labor markets showed impressive resilience, dispelling fears of a looming recession. However, the tight labor market might also contribute to stubbornly high inflation, potentially preventing the Federal Reserve from adjusting interest rates. Moreover, the Treasury market indicated limited relief for interest rates in the short term, with 2- and 10-year yields continuing their upward trend. Mortgage rates briefly eased during April and May, have now surpassed 7%.
While these factors have affected mortgage applications, home purchase sentiment remains relatively high compared to the lows experienced last year. As a result, California is expected to maintain a solid number of closed transactions in the coming months.
Mortgage Demand Affected by Rising Interest Rates
The rise in interest rates directly impacted mortgage demand, which had been steadily increasing over recent weeks. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) rose from 6.75% to 6.85%. Consequently, the demand for mortgages to purchase homes, which had seen three consecutive weeks of growth, dropped by 5% for the week.
Growing Confidence in the U.S. Economy
In June, U.S. consumer confidence reached its highest level in almost a year and a half, indicating renewed optimism in the labor market. Business spending also remained steady in May, signifying a robust economy despite concerns about a recession. The Consumer Confidence Index, developed by The Conference Board, rose to 109.7 in June from 102.5 the previous month. Younger consumers and those with annual incomes exceeding $35,000 were the primary contributors to this surge in confidence. However, many consumers anticipate a recession within six to twelve months.
Bay Area Homebuyers Opt for Condos
In the wake of the pandemic’s impact on the housing market, many homebuyers in the Bay Area are choosing condominiums and townhomes over more expensive single-family homes. This trend provides an opportunity for first-time buyers to build equity in starter properties. According to the California Association of REALTORS®, the median sales price for existing condos in May was $788,500, while the typical single-family home commanded $1.3 million. When the pandemic-induced home buying boom began in the spring of 2020, many first-time buyers took advantage of historically low mortgage rates to enter the condo market.
The cooling of last year’s intense seller’s market, characterized by bidding wars and over-asking offers, is encouraging for buyers. However, mortgage rates have risen by a full percentage point compared to last year, making homeownership more expensive. Although fewer buyers are currently active due to rising interest rates and market uncertainty, conditions have improved for buyers overall.