June 24, 2024 – Sales activity in the housing market remained stagnant last month as mortgage rates continued to fluctuate and stayed elevated at the end of May. Rate volatility in the past couple of months has also created renewed concerns for builders and pushed their confidence level down to the lowest level since late 2023. As a result of the market uncertainty, construction activity dipped accordingly in the latest report. Meanwhile, the supply side of the existing home market continued to improve in May as new active listings increased by double digits for the fifth consecutive month. Sellers are slowly adapting to the new normal and more homeowners begin to list their house on the market. With inflation showing more evidence that it has resumed its declining trend, the Fed is still expected to cut rates later this year, albeit at a more moderate pace. The moderation in rates, coupled with recent improvement in housing supply, should lift the market sentiment up and could create an opportunity for buyers to reenter the market before the homebuying seasons peaks.

More listings available on the market: The statewide unsold inventory index (UII) in May remained unchanged from the prior month for the third consecutive period but improved solidly from a year ago. Active listings at the state level rose on a year-over year basis for the fourth straight month and the increase was the largest in 15 months. Newly listed for-sale properties also increased from a year ago for the fifth consecutive month by double digits as more homeowners put their house up on the market. With recent economic reports showing some promising signs that inflation could be cooling in a more sustainable fashion for the rest of the year, mortgage rates may moderate in coming months as the daily fluctuations in yields continue. If interest rates indeed decline in the short term, further improvement in housing supply could be observed in California before the end of the home buying season.

Housing starts fall sharply as mortgage rates remain volatile: The U.S. Census Bureau reported a seasonally adjusted annual rate of 1.28 million units of housing starts in May, a drop of 5.5% from April and a sharp decline of 19.3% from May 2023. Last month’s decline in construction activity was due primarily to a sizable decrease in new multifamily development, as multifamily starts fell 10.3% from the prior month and plummeted 51.7% from 12 months ago. Single-family starts also declined both on a month-over-month and on a year-over-year basis, but at more moderate paces of -5.2% and -1.7% respectively. The slight yearly adjustment, despite being relatively small, was nonetheless the first dip in single-family housing starts since June 2023.

Builder confidence hit its lowest level since late 2023: Many homebuilders were put on pause as mortgage rates remained volatile in May, while labor shortages and buildable lots continued to be issues for developers. Homebuilder confidence, in fact, fell to the lowest level since December 2023, according to the National Association of Home Builders/Wells Fargo Index. With builders struggling to sell homes in recent months, the share of builders cutting home prices climbed from 25% in May to 29% in June. The usage of sales incentives also went up to 61% in the latest report from 59% in the prior month. With shelter inflation remaining high and the Fed not likely to make its first rate cut until September, builders adjusted their sales expectation downward with a four-point drop to 47 in the latest read. With a number below 50, the measure suggests that fewer homebuilders view market conditions as favorable than not.

California median home price sets another record-high: California home prices climbed further in May, with the statewide median up 0.4% from April and recorded a strong year-over-year gain of 8.7% from the same month of last year. The median price of $908,040 recorded last month was a new high for the state, and the solid increase from last May was the eleventh straight month of annual price gain for California. Stronger sales in higher-priced properties continued to contribute to median price growth, with million-dollar home sales rising more rapidly than their more affordable counterparts in the state. Based on historical data going back to 1979, California median price typically increases 0.9% from May to June, 0.4% from June to July, and 1.2% from July to August. As such, the statewide median price could potentially set more new records before the summer ends.

May retail sales provide more evidence that the economy is slowing: Consumers spent less than expected for the second month in a row but still contributed positively to sales growth both month-over-month and year-over-year. Retail sales in May went up from the prior month by 0.1% and had an increase of 2.3% from the year before. Prior to the release, economists generally expected sales to increase 0.2% on the month, one-tenth of a percentage point above the latest reported figure. A drop in fuel prices is partially responsible for the decline in retail sales, but the overall consumer momentum also appears to be fading. Furniture/home furnishing store (-1.1%) and bars/restaurants (-0.4%) both experienced monthly declines, while online outlets (0.8%) saw an increase from the prior month. Households may have begun to exhaust their borrowing capacity, as indicated by recent uptakes in revolving credit and a rise in delinquencies. Consumers could continue to take a breather in coming months if the labor market moderates further and they expect their income to rise more slowly than a few months ago.

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