October 23, 2023 – Mortgage rates continue their upward climb as daily rates top 8% several times over the past week. This comes as the bond market continues to price in “higher-for-longer” and rates for 10-year notes are quickly approaching 5% after remaining relatively flat through the first half of this year. Despite this, consumers remain a driving force of growth in the U.S. economy and this was reflected in last month’s labor market statistics for California that kept leisure and hospitality at the fore. Housing supply remains depressed and this is behind slower home sales in California, but despite the impacts to buyer demand as rates increase, home prices logged their third consecutive year-to-year increase last month.
Benefits of homeownership still alive and well: The Federal Reserve released its 2022 Survey of Consumer Finance report last week, which showed that homeowners continue to account for the majority wealth accumulation in the U.S. Last year, the typical, inflation adjusted, net worth for a U.S. household rose to $192,900. However, broken down by housing tenure shows that homeowner wealth reached a median of $396,200 last year, while median net worth for renters was just $10,400. This is only $1,000 higher than the previous all-time high set back in 1995 and demonstrates that renting continues to disappoint when it comes to generating wealth and highlights why owning a home is a wise long-term financial move.
Consumers remain undaunted by rates or debt levels: Despite the fact that credit card debt has risen by nearly $150 billion compared with pre-pandemic levels, retail sales rose again in September as consumers continue their assault on the services sector. Although some of this credit card debt has begun to grow delinquent, spending at bars, hotels, and restaurants remains strong. Even after netting out above-average inflation levels for the past year, real retail sales remain more than 10% above spending levels from January 2020.Given that consumers represent nearly 70% of U.S. gross domestic product (GDP), this suggests that 3rd quarter economic growth could come in much stronger than originally forecast, which will prevent the Federal Reserve from considering any potential rate cuts until next year.
Housing starts up for now, but not many single-family homes: Housing inventory remains the limiting factor on rebounding home sales, which is why last week’s updated housing starts for September were a source of hope against a backdrop of otherwise challenging market news. The number of new residential housing starts rose to a 1.4 million-unit pace last month. This is still likely below the level needed to meet demand given the lackluster numbers of the previous two years, but it is encouraging that new projects are moving forward despite the recent increase in mortgage rates. However, much of the activity was concentrated in multi-family building and the sustainability of the uptick has yet to be proven.
Rates continue to rise as bond market prices in “Higher for longer”: Daily averages for 30-year, fixed-rate mortgages have broken the 8% threshold twice over the past week as the bond market digests and accepts the Federal Reserve’s promise to keep rates higher for longer than originally anticipated. The current rate on a 10-year Treasury is quickly approaching 5% despite recent comments from the Fed Chairman that they are unlikely to raise rates before the end of the year and a flight to the safe haven of U.S. Treasuries as the conflict in the Middle East threatens to impact oil supplies. Although this means that the yield curve, which measures the spread between short- and long-term Treasuries and is typically a consistent indicator of future recession, is less inverted, it has come at the cost of higher mortgage rates that are increasingly likely to remain elevated through the end of the year.
California market trends down as rates rise: California’s housing inventory remains very tight, even by the standards of the past few years. However, the recent rise in rates also having a more pronounced effect on homebuyer demand than it has up to this point in the recovery. Home sales trended back down to roughly 240,000 units last month. This is still slightly above the low point reached back in November 2022, when sales fell to 235,000 units, but underscores that the return to more ‘normal’ levels of transactions will be a gradual process of fits and starts. Home prices are still on the uptick, and despite dipping slightly from August for seasonal reasons, the median closed price of an existing single-family home in California rose for its 3rd consecutive month on a year-to-year basis.
Job market remains strong, but unemployment rises: California added nearly 9,000 net new jobs in September as gains in tourism, bars/restaurants, entertainment, and healthcare offset declines in manufacturing, tech, and professional jobs. However, the unemployment rate rose to 4.7% as the number of unemployed workers rose above 900,000 for the first time in over 18 months. Weaker unemployment data suggests that the jobs numbers may not be as strong as is currently estimated—a theory supported by official, though 9-months lagged, data from the state on payments into the unemployment insurance system that suggests things may be weaker than headline numbers suggest.