California's Market Minute for March 15th, 2022
This week marks the second anniversary of the start of the pandemic. A shelter at home mandate, that Americans expected to last 2-4 weeks, quickly evolved into a new normal. Fast-forward 104 weeks later, the U.S. economy continues down the road to full recovery, although it is doing so amidst growing headwinds. There has yet to be a significant de-escalation of tensions overseas, gas prices and supply chain issues are contributing to ongoing inflationary pressure, the Federal Reserve is set to raise target interest rates this week, and the housing market remains extremely competitive despite rising mortgage rates. Demand remains relatively strong, and there is some evidence that inventory is gradually starting to thaw, but real estate faces many variables in the months ahead.
Homeowner equity up $3.2 trillion as U.S. home prices rise: National homeowner equity rose 29.3% year-over-year in Q4 2021. Average homeowner equity in western states saw the biggest gains by dollar value, led by Hawaii ($128,300), California ($117,000), and Washington ($95,000). The robust home price appreciation over the last year has helped push the negative equity figures to the lowest in over a dozen years with only 1.1. million homeowners underwater on their mortgages nationwide—California having the lowest share (0.8%) with negative equity.
Pending sales are keeping up the pace with new listings: The weekly number of pending sales was the highest in the last 20 weeks (since mid-October) last week. Despite robust gain in home prices and rising interest rates, homebuyer demand remains unexpectedly strong. Several key measure show a competitive market as the number of days a home was “Active” before going “Pending” on the MLS, shrunk to a near-records low of 11 days. In addition, 7/10 homes closed last week sold above asking price, which will likely contribute to further price gains.
Following two weeks of declines, mortgage rates rose: Treasury yields increased ahead of Fed’s first anticipated hike in rates since 2018. According to Freddie Mac’s survey the weekly average for a 30-year fixed rate mortgage averaged 3.85%, up from 3.76% the week prior and up by 80 basis points from a year ago when it averaged 3.05%. Over the long-term, rates are expected to continue rising as inflation broadens. However, uncertainty about the war in Ukraine is driving volatility in the short-term.
Inflation sets fresh 40-year high: Consumer prices jumped another 0.8% in February pushing the CPI to 7.9% over last year. The pace at which the cost of good & services continues to rise is unsettling for consumers and will likely erode growth in real income. Moreover, the recent surge in commodity prices, geopolitical tensions, and increasing wage and housing costs stand to keep upward pressure on short-term inflation.
Consumer sentiment and small business optimism fell alike: Against a backdrop of worsening inflation, consumers and businesses alike expressed a less optimistic view on the economy and their respective outlooks over the next year. The University of Michigan’s consumer sentiment fell to 59.7, its lowest since 2011. Similarly, the National Federation of Independent Business (NFIB) Small Business’ Optimism Index fell 1.4 points in February to 95.7, marking the second consecutive month that the index has been below the 48-year average.
U.S. labor market very tight, California Gets a Boost: The Bureau of Labor Statistics reported that job openings for January remain elevated at 11.3 million. In addition, recently revised estimates from the state Employment Development Department show that California’s employment recovery was even strong last year than originally reported. To date, the state has added back nearly 2.3 million of the roughly 2.8 million jobs (82%) lost at the start of the pandemic in 2020. California’s unemployment rate has also dipped below 6% for the past 3 months.