Interest rates continue their upward march, but the housing market in California remains competitive with few signs of buyers pulling back despite another rate hike by the Federal Reserve last week. The latest jobs report showed continued expansion in the macro economy, but the ongoing labor shortage arising from a depressed labor force will mean that the Fed is likely to remain aggressive in their approach to inflation, meaning that longer-term rates will likely rise further as well. Fortunately, listings continue to rise across the state, which should help buyers eager to find a home before rates climb any higher.
Closed sales fall in April, but pending holding up well: California’s housing market continues to moderate from the 12-year high levels we saw in 2021, but given the tremendous rise in interest rates recently, the relative stability of pending sales is encouraging. On a month-to-month basis, closed sales likely fell further from 2021 levels. In addition, almost 72 out of every 100 homes is still selling above asking price.
Active listings rise by double-digits for 2nd consecutive week: At the onset of the coronavirus pandemic, active listings in California began to contract rapidly. C.A.R. began pulling weekly data from the MLS the second week of March 2020, which means that we can begin calculating annual growth in active listings on March 14, 2021. Every singly week from then to February 12, 2022, the number of homes available for sale fell the same week one year earlier—for 49 consecutive weeks of year-to-year contraction. Last week, active listings rose by 12.4% from the first week of May 2021 following a 12.5% increase the week before. There are now more than 31,000 homes listed for sale across the state, which is the first time buyers have had this many options to choose from since Halloween.
Mortgage delinquencies continue to fall: Despite the myriad challenges facing the economy, housing market, and individual households, the ongoing decline in mortgage delinquencies suggests that foreclosures are likely to remain very low even as they rise in the wake of many federal and state protections expire. Not only were these mortgages underwritten to very high standards, most homebuyers put significant savings into their homes as down payments, and the overwhelming majority of homeowners have built significant home equity over the past few years. California, in particular, stands out with one of the highest shares of current mortgages compared with other states.
Job growth continues, but at a slower clip: The U.S. economic recovery from the pandemic continued in April with the latest jobs report showing 428,000 in net job creation. This marks the 16th consecutive monthly increase, which has helped to push the unemployment rate nationwide to just 3.6%–the lowest level since the start of the pandemic in March 2020. Initial claims for unemployment did rise by 19,000 last week to 200,000, but remain well below historical averages suggesting that the economy continues to improve.
The Federal Reserve raises rates by 50 basis points: As expected, the Federal Reserve raised their target interest rate by 50 basis points last week in their ongoing battle to tame consumer inflation that has risen to its highest level in more than 40 years. As a result, mortgage interest rates, which have already risen from roughly 3% at the beginning of the year to 5.27% in the latest Freddie Mac survey, are expected to continue their upward climb. In addition, mortgage rate spreads with 10-year treasuries may widen in coming months as the Fed will also begin reducing the size of its balance sheet, providing more supply of mortgage backed securities to the market—a move that could cause prices on MBS to fall in order to attract investors, leading to higher rates on mortgages originating.
Mortgage applications falling by double-digits consistently now: Last week, mortgage purchase applications continued to fall below pre-pandemic levels with another double-digit decline from 2021 levels. This marks the 3rd consecutive weekly decline that was greater than 10% on a year-to-year basis and the 5th such decline in the past 7 weeks. Given that mortgage applications typically peak in April, closed sales will likely benefit from better mortgage applications for the next month, but the trajectory of applications suggests that sales will fall short of 2021 levels, which is in line with C.A.R.’s current forecast.