July 22, 2024 – The latest macroeconomic data has been helpful to California’s housing market, which continue to battle back from the surge in interest rates last year. Home sales did slide modestly in June as interest rates in April and May disrupted the upward trajectory the market has experienced since the end of 2023. However, pending sales suggest that the recent decline in mortgage rates helped demand to begin ticking up over the past few weeks. Fortunately, the recent reduction in rates has been coupled with an increase in supply—both from an uptick in resale inventory as well as a rebound in new construction in the latest data. After last week’s inflation report, homebuyers and homebuilders appear to be slowly regaining their confidence.

Interest rates continue their downward trend: The Federal Reserve is set to meet at the end of July and interest rates have been steadily improving in hope of an early rate cut. Most odds expect the first cut to take place in September of 2024 rather than the upcoming meeting, but Treasury rates have also been improving on signs that inflation is gradually coming down after dipping below 3% year-to-year in June for the first time since prices began to rise in the aftermath of the pandemic. 10-year bonds hit their lowest level since February last week, and the 2-year has also fallen, which helped the ‘yield curve’ to become less inverted in recent weeks. This suggest that the bond market is becoming more optimistic that the Fed may be able to achieve their coveted ‘soft landing,’ but interest rates should continue trending down even if the Fed decides to hold off on any rate cuts in July—albeit with ongoing volatility.

Home sales slipped in June but could bounce-back in July:  California home sales pulled back in June as interest rates remained volatile at the end of the second quarter. Sales of existing single-family homes at the state level dipped to 270,200 last month, a decline of 0.8% from 272,410 in May and a drop of 2.7% from 277,690 in June 2023. On a year-to-date basis, home sales have scaled back since the beginning of the year and have now fallen behind last year’s level by 0.5 percent through the first half of the year. Despite rates fluctuating throughout the month of June, newly opened escrow sales appeared to be making some improvement in the past few weeks as average pending sales per transaction-day increased 8% from a year ago. With inflation easing but remaining higher than the Fed’s target, the U.S. central back is still expected to cut rate later this year but at a more moderate pace than previously anticipated. As such, home sales should improve in the second half of the year but at a more gradual pace than what was projected earlier.

Housing supply remains on an upward trend: California unsold inventory index (UII) in June increased from both the prior month and the same month of last year, with active listings up 36.0% on a year-over year basis. Newly listed for-sale properties also increased from a year ago for the sixth consecutive month and the pace of growth remained solid in the past few months. In fact, average new active listing per business day in June continued to increase by double-digits for the fourth straight month since February. With recent economic reports showing promising signs that inflation is cooling in a more sustainable fashion, mortgage rates could moderate in coming months. As such, further improvement in the supply side could be observed in California before the end of the home buying season.

Housing starts improve as multi-family jumps: The U.S. Census Bureau reported a seasonally adjusted annual rate of 1.35 million units of housing starts in June, an increase of 3.0% from May but a decline of 4.4% from June 2023. Last month’s increase in residential construction activity was due primarily to a surge in new multifamily development, as multifamily starts jumped 22.0% from the prior month but remained 23.4% below last year’s level. New apartment units completed, in fact, reached a 50-year high in June, which is good news for renters as rents tend to cool when there is more supply available in the market. Single-family starts, on the other, posted its fourth consecutive decline last month as mortgage rates continue to keep a lid on the building of one-housing units. With the Feds likely to reduce rates at the end of Q3, mortgage rates should come down and single-family constructions are expected to improve in Q3 and Q4.

Cracks starting to show in California labor marker despite strong headline: On the surface, California’s labor market remains firmly in the midst of its post-pandemic expansion. The Golden State added another 22,500 nonfarm jobs in June, making it the 3rb best month for job creation this year. However, the same report showed some signs that employment conditions have softened slightly from the fevered pitch of 2021 and 2022. More than half of all the jobs created were in healthcare or the public sector, while 7 industries including Manufacturing, Administrative Support, and Management shed jobs last month. In addition, California’s unemployment rate has now been above 5% for 10 months consecutively as the number of unemployed workers has remained near 1 million for the entirety of the year for the first time since dipping below 1 million at the end of 2021. Fortunately, new unemployment insurance claims remain relatively steady at roughly 50,000 per week, which suggests that California is not seeing a surge in layoffs. However, the consistent rise in continuing unemployment insurance claims indicates that recently unemployed workers are taking longer to get back to work now.

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