April 15, 2024 – We remain in a paradoxical environment where the ongoing strength of the U.S. economy raises concerns for the housing market. Strong jobs numbers last week were followed by equally strong inflation numbers this week, and then retail spending numbers exacerbated concerns that any rate cuts from the Fed would not come until the second half of the year, if at all. As a result, the bond market has sent interest rates climbing as investor demand for treasuries declines. The 10-year note has now surpassed 4.5% for the first time in nearly 6 months and mortgage rates have followed them north of 7% again. The outlook has not changed dramatically, but we expect more speedbumps in the coming months as the markets digest the latest data.

Inflation Moves Wrong Way, Scares Bond Market: The latest inflation data topped expectations for the third month in a row, with the March headline Consumer Price Index (CPI) registering an increase of 0.4% month-over-month and an increase of 3.5% year-over-year. Economists generally expected last month’s index to climb 0.3% and 3.4%, respectively. Energy and shelter costs continued to represent the driving force fueling a solid increase in the headline CPI number. The Core CPI – inflation excluding food and energy – recorded a year-over-year growth of 3.8% in March, a touch higher than the estimated 3.7% projected by the consensus. With consumer price inflation remaining sticky in the latest report, the Federal Reserve will likely stay put in their upcoming meeting in May. The economy should ease starting at the end of the second quarter and we still expect the central bank to cut rates before the end of the year.

Mortgage Rates React to Stronger-Than-Expected Economic Data: Higher-than-expected inflation caused a severe reaction in the bond market last week as 10-year Treasury rates jumped above 4.5% for the first time since November as the odds of a Fed rate cut before the end of the second quarter drop. As a result, mortgage rates jumped up as well with the average 30-year fixed-rate mortgage being quoted at 7.44% in the latest daily numbers. The recent rise in rates has weighed on closed and pending sales, which lost some momentum in March after rising solidly in February. However, longer-term rates have been catching up to where short-term rates have been for some time, leaving the yield curve less inverted now than it has been since rates began rising sharply in 2023. This suggests that a “soft landing” that avoids and economic recession is more likely now than was perceived last year.

Housing Inventory Thaws, But Supply Still an Issue: Even with the jump in rates and consequent impact on purchasing power for potential homebuyers, housing supply remains the largest obstacle to more home sales. Fortunately, the inventory shortage has begun to thaw very slightly of late. New listings have been growing on a year-to-year basis providing more options to buyers that are finally beginning to replenish closed transactions each month. However, the number of homes reaching the market are still too few to prevent rising competition as we enter the Spring Homebuying season. The median number of days a home takes to enter into escrow has fallen into the teens in recent weeks and nearly half of all the transactions are closing above list price once again. Home sales are expected to moderate in response to this more recent jump in interest rates, but the strong economic data and low levels of unemployment continue to put pressure on a housing market that is near historic lows for supply.

Big Spending Report Shows Undaunted Consumers: Although savings rates continue to fall and credit card balances and delinquencies are rising, consumer spending continues to be a significant driver of economic growth. Just like the latest jobs numbers, household spending came in much better than expected. Consumption represents nearly 70% of the U.S. economy and ongoing strength in the household sector in the form of very low unemployment with rising wages and income has translated into overperforming GDP for the past few quarters when many had expected to see the spending boom slow. Many growth forecasts for the first quarter are now being revised upward, which is likely to be viewed as a negative in the bond market because it will be seen as a reason the Federal Reserve will use to delay any rate cuts.

Housing Affordability Deteriorates for All Ethnic Groups in 2023: With interest rates rising further, housing affordability continued to deteriorate for all ethnic groups last year. The share of non-Hispanic, White households that can afford to buy a median-priced home in California dropped from 25% in 2022 to 21% in 2023.  The index declined to 28% for Asians, down to 9% for Hispanic/Latinos, and down to 9% for Blacks. Gaps in housing affordability last year narrowed, but remained wide. The difference in affordability between Blacks and the overall population in California narrowed slightly by 1.2 percentage points to 8.5 last year, and the gap for Hispanic/Latinos dipped 0.7 percentage points to 8.9.  While interest rates are projected to decline in 2024, affordability is not likely to improve much this year as home prices are expected to climb moderately.

Builder sentiment stalls in April: As mortgage rates remained elevated and frustrated homebuyers returned to the side-line in the last few weeks, builder sentiment was flat in April, reported by the National Association of Home Builders (NAHB). The NAHB Housing Market Index (HMI) had been climbing for four straight months and reached the highest point of 51 in eight months in March. April was the first time since December that the index failed to make an improvement. At the regional level, the 3-month average for the West continued to register a 4-point gain to 47 with the latest figure. The latest report also indicated that 22% of builders cut prices in April, a decline from 24% in March.  More than half (57%) of them continued to use sales incentives to attract buyers in April, a decline from 60% reported in March though.

Note: The weekly market minute report is updated every Monday by 6:00 PM PST.