Sales of existing single-family homes in California edged up from the prior month, despite dropping sharply from a year ago. While recent pending sales statistics suggest continued improvement in home sales in the coming months, a renewed concern that the Federal Reserve will keep rates high has sparked a surge in rates and created a cloudier market outlook for the short term. Meanwhile, resilience was on full display in last week’s economic news. Inflationary pressures continued to trend down, though the decline was at a much slower pace than many had estimated. Strong retail sales were partly to blame for the still-elevated price levels, as consumer spending rebounded sharply in January. Homebuilders’ confidence also rose to its highest level since September, despite housing starts contracting further at the beginning of 2023.

California’s housing market kicked off the year with a weak start: Sales of existing single-family homes remained below 250,000 for the third consecutive month and declined 45.7% from a year ago. The market might have already reached its bottom, however, as California home sales edged up for the second straight month as homebuyers took advantage of lower interest rates and lower prices in January. With pending sales remaining on a declining trend but receding at a slower pace in January, the market should see another improvement in closed sales in February. Home prices, on the other hand, continued to dip on a year-over-year basis and will drop further next month due to seasonality and higher costs of borrowing.

Housing construction might continue to underperform despite builders’ optimism: Total housing starts in January dropped further by 4.5% to an annualized pace of 1.3 million units, their fifth consecutive decline and the longest losing streak for residential construction since 2009. Building activity dropped for both single-family (-4.3%) and multifamily (-4.9%), pushing residential construction considerably farther behind last year. Homebuilders’ optimism in February improved nevertheless, as their confidence rose to its highest level since September. The monthly increase in their confidence was the largest in nearly a decade and was attributed primarily to the dip in mortgage rates in early January. With rates rising again since early February, builders’ confidence could take a step back in the next report.

Inflation continues to cool at a slow pace: Prices for consumer goods & services in the U.S. eased for the seventh month in a row in January, as the rate of growth over the last 12 months dipped to 6.4% from 6.5% in December. The Consumer Price Index (CPI), however, accelerated at the fastest monthly pace since October, which is an implication that overall price level will continue to be high in the near term. With the labor market remaining strong at the start of 2023, the Fed will likely raise rates again in at least their next meeting, and mortgage rates will remain elevated for most of the year.

Retail sales renew rate hike concerns: Retail sales bounced back in January after declining in three of the last four months. Sales at retailers rose 3%, the largest monthly increase since March 2021, indicating that even with elevated inflation pressures, consumers continue to spend. While auto sales boosted the overall sales gain for the month, sales at all other retailers also improved a solid 2.3%, which suggests a broad-base spending from consumers in the economy. January’s retail sales report may show resilience from consumers, but there’s no denying that their spending has slowed from their breakneck pace earlier in 2022. The stronger-than-expected retail sales number, however, is another reminder that the inflation fight is far from over, and it is too early to expect the Fed to pivot.

Mortgage rates increase as yield markets anticipate further tightening by the Fed: The bond market might have been overly enthusiastic that inflation was going away, and the economy was slowing which led to mortgage rates trending lower in January. With the latest CPI and retails sales reports painting a picture of higher-than-expected inflationary pressure and stronger-than-expected consumers demand, Treasury yields rose last week as investors reacted in anticipation of further rate hikes by the Fed. Mortgage rates climbed again for the second consecutive week as a result, with the average 30-year fixed-rate mortgage (FRM) as of February 16 jumping 20 basis points to 6.32% from the prior week.