Mortgage Rates Ease as Debt Ceiling Crisis Avoided

June 6, 2023 – The recent agreement reached by Congress and the White House to raise the debt limit has positively affected mortgage rates. After reaching a peak of 7.14% earlier in the week, the average 30-year fixed-rate mortgage (FRM) declined to 6.79% by the end of the week, thanks to the early signs of a debt ceiling agreement. While the decline in mortgage demand has slowed down, new applications are still decreasing. However, the purchase index remains low, and homebuyer demand is expected to remain below pre-pandemic levels as long as rates stay in the 6-7% range, waiting for inflation to calm down.
Strong Jobs Report Puts Pressure on the Fed

Despite the Federal Reserve’s efforts to stabilize the economy with interest rate hikes, the labor market continues outperforming expectations. In May, the U.S. economy created 339,000 net new jobs, surpassing the consensus forecast. The high demand for workers persists due to the labor shortage caused by the pandemic’s impact on the service sector and early retirement. As wage growth plays a significant role in combating inflation, the Fed’s upcoming meeting on June 13-14 will be closely watched to see if they decide to raise rates again.

Consumer Confidence Dips Despite Strong Jobs Data
Although more jobs were added in May, consumers have started expressing concerns about future job prospects. Consumer confidence experienced a slight dip during the month, with fewer reported opportunities and fewer workers quitting their jobs compared to pre-pandemic levels. While reduced job availability may alleviate inflation, it also means slower wage growth. Factors such as decreased savings, rising credit card debt, and tightening credit standards might lead to a more cautious approach from consumers, who have been the driving force behind economic growth in recent years. Plans to make big-ticket purchases in the near future were down across the board in May.

Housing Market Remains Hot with Limited Inventory
Despite higher interest rates and economic uncertainties, the housing market in California, particularly in Ventura County, continues to be highly competitive due to solid demand outpacing available supply. May saw a slight increase in sales, but inventory remains extremely tight. Typically, new listings increase during the summer, but they started declining in May this year. Consequently, homes are selling much faster, with a median of 15 days on the market compared to 42 days back in January. Furthermore, an increasing number of buyers are paying premiums, with approximately 50% of sales closing above the list price in the past two weeks. This is a significant rise from the 20% seen at the beginning of the year.

Construction Spending Improves, Manufacturing Slows
Recent estimates from the Census Bureau indicate that construction spending has increased for the third consecutive month. Overall, spending rose 1.2% in April, translating to a 7.2% annual increase. While inflation in building materials has eased, the construction supply chain has yet to fully recover from the effects of the pandemic. Although construction job openings rose by 383,000 in April, they are still down from the peak in December 2022 by 488,000. Multifamily and non-residential projects primarily drove the growth in spending. Residential spending saw a modest 0.4% increase over the month but remains 9.1% lower than the previous year. Private single-family spending experienced a decline for the twelfth consecutive month, falling by 0.8%.

New Home Sales Rise for Second Consecutive Month
With existing home inventory remaining low in April, buyers turned to new construction as an alternative. Sales of new homes increased by 4.1%, reaching a seasonally adjusted annual rate of 683,000, the highest since March 2022. This represents an 11.8% increase compared to the same period last year. However, in the West region, sales declined by 9.1% month-over-month in April after a surge in March. Compared to the previous year, April sales also dipped by 2.8%. Builder incentives have driven the demand for new construction, although they are becoming less common as housing demand stabilizes and inventory shrinks. Nevertheless, the supply of new homes, which stands at 7.6 months, remains significantly higher than the supply of existing homes, which is at 2.9 months.