May 13, 2024 – The 30-year fixed-rate mortgage continued to edge down last week as the bond market settles after several strong economic reports. The Fed has taken further rate hikes off the table for now and although headline inflation increased last month, there are nascent signs that cuts later this year are not ruled out yet. Same store sales at many fast-food retailers along with weaker employment data in the household survey than the monthly employment report, along with fewer workers quitting jobs voluntarily all suggest that the inflationary pressures may finally be hitting households. In spite of all of the volatility in interest rates, California’s housing market has only gotten hotter as we enter the homebuying season in earnest with every measure of competitiveness on the rise last week.

Employment data telling two different stories: Much of the strong inflation numbers can be traced back to very tight labor markets and rising spending in the service sector along with rising shelter costs. However, there are early signs that the labor market may have already begun to cool. The monthly jobs report, which measures filled positions at employers came in below expectations for the first time in several months. In addition, the survey of households, which asks workers whether they are employed or not, has been flat or negative for the better part of 6 months. And, although the number of new unemployment insurance claims has been fairly steady in California, continuing claims have been rising consistently, which implies that it is taking longer for workers to find new jobs following a separation. This could help to ease inflationary pressure if the trend persists.

Mortgage rates continue to inch down: The strong GDP growth rate for the first quarter and an increase in the headline inflation numbers sent bond rates rising sharply three weeks ago as markets braced for a potential Fed rate increase at their May meeting. However, an April jobs number that came in below expectations along with some underlying signals that consumers may be losing momentum have helped 10-year rates stabilize in the 4.5% range in the past week. As a result, mortgage rates have inched down slightly, with the Freddie Mac average dipping to 7.09% last week after rising above 7.2%. The daily tracking shows more improvement this week, though progress has been very modest. Still, with same store sales for fast food restaurants falling as credit card debt continues to rise and the labor market hints at softening, 8% should remain the high watermark and we may even see rates continue to creep down as we approach the second half of the year.  

California housing market remains hot despite 7% rates: Even as interest rates surged in March and April, California’s housing market is still showing signs that it has more buyers than homes to put them in. Current conditions are characterized by median days on market falling into the teens, homes selling above list price rising to a majority of closed sales, and price growth that is approaching double-digits once again. Home sales have suffered as rate movements impact rate locks and prequalifications, but inventory remains depressed and that has helped to keep the market hot. Fortunately, the number of new listings continues to rise and total active inventory is approaching levels not seen since immediately before the pandemic, which should help to bolster more sales in the second half of the year. 

Affordability remains challenging despite seasonal uptick: Housing affordability in California kicked off the year with a slight improvement from the prior quarter but remained below a year-ago level. The statewide index for existing single-family homes increased 2 points from Q423 to 17 percent in Q124 but declined from the same quarter of last year by 3 percentage points. High prices as a result of tight supply and elevated mortgage rates are keeping borrowing costs near all-time highs, ultimately keeping California affordability near the lowest level in 16 years. Although the monthly mortgage payment for a median-priced home (including taxes and insurance) dipped 6.5% from Q423, it jumped 10.9% from Q123 as the effective mortgage rate stayed above the year-ago level by 38 basis points (bps).

Nation’s CEOs remain upbeat about soft landing:  A survey of 136 CEOs conducted during the second week of April shows that business leaders were slightly more optimistic about the economy in Q2 after increasing in Q1. Downside risk, in particular, seems to have become less of a concern over the past 6 months as only one-third of respondents are anticipating a recession compared to almost three-quarters at the end of 2023. This survey also hinted at easing labor market conditions noted above as a smaller share of CEOs reported having difficulty filling open positions. However, rising wage pressures are likely to persist as workers are still relatively scarce.

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