C.A.R. Weekly Market Minute
July 04, 2022 – With mortgage rates steadily coming down after reaching a recent peak in mid-June, the market began to show some signs of stability as purchase mortgage applications remained unchanged from the prior week. Home sales remained depressed from the prior year, however, as economic uncertainty and higher borrowing costs continued to expand their role in homebuyers’ decision to purchase. With inflation remaining high and the economy expected to pull back, the market will normalize further in the second half of 2022 with softer sales and more moderate price growth.
Mortgage applications increase as the rapid rise in rates takes a pause: According to Freddie Mac’s Primary Mortgage Market Survey (PMMS), the weekly average 30-year fixed-rate mortgage as of June 30, 2022, came down to 5.70% from 5.81% in the week prior. The decline in mortgage rates in recent weeks boosted the mortgage application volume up for the week ending June 24 by 0.7% from the prior week. The weekly gain was due primarily to an increase in refinancing activity, as the Refinance Index ticked up 2% from the week before. Purchase applications, on the other hand, were essentially flat from the prior week and were 24% lower than the same week one year ago. Overall purchase activity continued to be weakened by elevated rates, higher homes prices, and growing economic uncertainty.
Housing sentiment dips again as the market shifts: Consumers were less positive about the state’s housing market conditions in June than they were in prior months. Results from the C.A.R.’s latest monthly sentiment survey show that 79% of the consumer respondents believe that the overall economic conditions in California will not improve in the next 12 months, while 85% believe that interest rates will not fall within a year. Only 14% of the respondents think it is a good time to buy a home, a slight increase from the record low reached in May, but still a sizable decline from last June’s 19%. While those who believe it is a good time to sell a home remains above pre-pandemic levels, the sharp monthly decline of seven percentage points from 68% in May pulls the index down to the lowest level in 16 months.
Cooling consumer spending points to further economic slowdown: U.S. household spending slowed to a 0.2% advance in May, as Americans faced historically high inflation and elevated interest rates. This was the smallest monthly gain in 2022, and down from the revised 0.6% increase in April. Elevated and persistent price pressures have negatively impacted real disposable personal income and it is weighing on consumers' ability to spend. Inflation-adjusted income, in fact, declined by 0.1% in May, which is an indication that wage growth was not able to keep up with price increases. Real personal spending slipped 0.4% in May as a result, even as consumers continued to save less compared to pre-pandemic levels. For now, consumers may still have the ability to rely on their savings, but they may not be able to do so for too long.
Consumer confidence dips to 16-month low: The Conference Board’s Consumer Confidence Index fell to 98.7 in June, a drop of 4.5 points from 103.2 in May, and was far below its reading from 128.9 in June 2021. The decline in confidence was mostly tied to consumers’ expectations on the short-term outlook for income, business, and labor market conditions, which dropped 7.3 points to 66.4 – the lowest reading in more than 9 years. Consumers reported growing more concerned with coming conditions after looking at their finances, elevated gas prices and deteriorating labor market prospects. Intentions to buy cars, homes, and major appliances held relatively steady in May, but have cooled since the beginning of the year. Vacation plans also have softened as prices continue to rise.
Overall construction spending declines but residential remains solid: Total construction spending dipped 0.1% month-over-month in May, but still increased 9.7% from last year. Most of the gain was attributed to the residential side, which posted a 0.2% gain from April and was up 18.7% year-over-year. The rise in residential spending was primarily due to an increase in home improvement spending, which jumped 0.6% in May from a month ago. Higher interest rates and a slowdown in buyer demand, however, will moderate spending as builders scale back production going forward. The softening in single-family buying conditions will also likely bolster multifamily construction.