California Association of REALTORS Market Minute for March 21st
As expected, the Federal Reserve raised its federal-funds rate last week for the first time in more than three year and signaled more rate hikes to follow for the rest of the year, in an effort to slow inflation that is rising at the highest level in 40 years. The move, along with the narrative, prompted interest rates to climb, with the average 30-year fixed rate mortgage surging above 4% for the first time since May 2019. Higher rates and the ongoing geopolitical conflicts will no doubt create challenges for the economy and the housing market for the rest of the year. Despite recent rate increases, the latest housing report suggests that the market is still strong, and the momentum could continue in 2022. With new and existing housing supply expected to improve in the near term, California will likely experience a solid homebuying season in the upcoming months.
Fed raises rates for first time since 2018: The Federal Open Market Committee (FOMC) approved its first rate hike since December 2018 at its March 15-16 meeting, raising the federal funds rate target range by 25 basis points to 0.25% - 0.5%. The Fed also indicated that there will be increases at each of the six remaining meetings this year, with three more hikes next year and none in 2024. Fed Chairman Jerome Powell also hinted that the balance sheet reduction could begin in May, and the process could be the equivalent of another rate hike this year. Rates did not move immediately after but jumped higher by 20 basis points earlier this week after the Chairman commented that the Fed could raise rates at a quicker pace.
California home sales stay solid as rates climb further: The statewide home sales declined 8.2% on a year-over-year basis to 424,640 in February and dipped 4.5% from the prior month. Despite the decline, housing demand remained strong relative to pre-pandemic levels in 2018 and 2019 when sales registered a monthly average of 400k. Higher rates and tighter supply condition continued to be the primary contributors to slower sales in February. The supply condition is improving slightly though, as active listings climbed to the highest level in three months and the year-over-year decline was the smallest in 31 months. The statewide median price continued to increase from the prior year and reached $771,270 in February. With housing supply and demand expected to remain imbalance in 2022, the statewide median price should increase further as the market approaches its home buying season in the next few months.
U.S. housing starts jump in February, but the West remains soft: New home constructions at the national level rebounded in February to the strongest pace since 2006, with residential starts advancing 6.8% month-to-month to 1.77 million. The number of homes under construction at the end of month increased to 1.58 million units, reaching a new cycle high. As Omicron-related worker absences began to subside as the COVID spread slowed, construction activity started picking up. While shortages and higher costs in building material continue to post supply-side challenges to the construction industry, builders are also slowly coping with the headwinds. The West was the only region that registered a drop, with a decline of 11.4% from last year.
Builder confidence dips but remains at a historical high level: The National Association of Homebuilders (NAHB)/Wells Fargo Housing Market Index (HMI) dipped to 79 in March from 81 the month prior, declining for the third consecutive month since the end of 2021. The drop in the headline confidence number was due primarily to the combination of material shortages, high prices, and rising rates that scale back the sales outlook. Despite the decline, the HMI is still much higher than the pre-COVID era and remains in good shape by historical standards.
Retail sales slow as Americans face higher prices: Consumers increased retail spending in February, but at a much more moderate pace when compared to the January’s level. The month-to-month increase of 0.3% in retail sales from January was slightly below consensus expectation, and the tepid gain was due partly to inflation - especially in the energy sector, as motor fuel prices went up 6.7% last month. Excluding autos and gasoline, retail sales were down 0.4% in February. Overall spending remained strongly above pre-pandemic levels though, with retail sales surging 17.6% from last year and increasing 24.9% from January 2020.
Previously posted at the California Association of REATLORS