July 01, 2024 – The combination of recent macroeconomic and market data reports lend themselves to cautious optimism about the trajectory of the housing market in California for the second half of 2024. Mortgage rates have stabilized and even come down slightly after spiking again in April and May. The treasury market is also supportive of less rate volatility in coming weeks, and both trends should help to bolster housing demand before kids return to school. Rising inventory has helped to relieve some competitive pressure on transactions here in California, which should come as welcome news for would-be homebuyers—particularly as it comes paired with an improvement in rates. Despite the generally positive backdrop, homeowners insurance remains the persistent challenge in California elsewhere as recent reports show premium have risen significantly, policies are less available, and prices are poised to go even higher.

Mixed messages on interest rate surveys, but Treasuries have improved: The average 30-year fixed-rate mortgage published by Freddie Mac dipped to 6.86% last week—marking its 4^th consecutive decline after rising above 7% for April and much of May. However, Mortgage News Daily has rates tracking roughly sideways over the past two weeks with a jump reported the first day of July. One is backward looking and the other is based on future expectations, but both are inherently driving by the market for Treasuries. Fortunately, 10-year yields have shown more consistent movement in the right direction as rates have dipped from 4.7% following strong job and inflation reports for April and May to 4.3% last week. This is expected to keep mortgage rates stable over the near term and remains consistent with gradually falling mortgage rates in the latter half of the year.

Elevated rates keep lid on home sales, but remaining buyers finding more options and less competition: Rates continue to hover in the 7% range, and this has taken some wind out of the sails of California’s recent recovery. However, preliminary numbers on pending sales in June show that activity may have stabilized during the second half of the month alongside rates. This represents good news for buyers who remain eager to buy as the pace of new listings combined with slightly fewer sales equates to more options for them to choose from. In addition, this uptick in inventory has helped to dial back the intense competition that characterized the first half of the homebuying seasons. The median time on market has inched up from two to nearly three weeks and the percentage of homes has dipped slightly from a majority in May to 46.6% of homes that closed last week.

Labor markets easing, but wage inflation will remain elevated: Along with housing, wage costs remain the other persistent source of inflation owing to the first sustained labor shortage since the government began tracking job openings back in 2000. At its height in early 2022, labor demand exceeded labor supply by nearly 6.2 million workers. That gap has shrunk to just 1.6 million in the latest data, but there remains significant excess demand for labor that will keep upward pressure on wages. The impact of early retirements has left a hole in our workforce that has made recruitment costly and difficult. While virtually every other cohort has seen labor force participation return to pre-pandemic levels, participation of workers aged 55+ (our second largest segment, representing nearly a quarter of the workforce) fell from over 40% in early 2020 to 38% now and continuing to trend downward. Thus, while inflation is expected to show ongoing improvement, its progress and thus, the impact on mortgage rates, is expected to remain incremental.

New home sales pull back again as rates weigh on sales: The U.S. Census Bureau and the Department of Housing and Urban Development reported sales of newly constructed homes in the U.S. dropped in May by 11.3% month-over-month and 16.5% year-over-year to 619,000 units. The decline in new home sales was the largest since September 2022 with units at their lowest level in six months. The sharp double-digit drop was bigger than the market projected, though consensus expected a decline. New home sales continued to pull back as more existing homes became available and mortgage rates remained stubbornly high. Despite fewer sales, the number of for-sale properties climbed slightly from April with new home inventory rising to 481,000 units in May. That represents an increase of 1.5% from the prior month and 12.9% from the same month of 2023. New home inventories rose to 9.3 months and appeared to be putting some downward pressure on new home prices as the median price slipped 0.9% from a year ago to $417,400.

Our Nation’s insurance woes continue with California leading the way: A recent study or more than 1,500 homeowners across the nation by ClaimGuide.org found that 3 out of 5 homeowners have seen their hazard insurance increase over the past year with roughly one-quarter either struggling to find affordable insurance, having to cut back on other expenses to offset higher premiums, or both. A separate study by S&P Global Intelligence showed California at the leading edge of this trend, with some of the largest increases in premiums last year, averaging 10% and up cumulatively since 2018 by 43.7%. It also appears that this challenge will continue to intensify as State Farm recently requested an increase from the State of California of 30% for homeowners, 36% for condos, and 52% for renters.

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