RELEASED BY THE CALIFORNIA ASSOCITION OF REALTORS July 03, 2023 –
Learn more about the latest on the California Housing Market:
The U.S. economy survived the first half of 2023 without going into a recession, as consumers turned out to be more resilient than most economists expected. Despite going through high inflation rates, banking crisis, and debt ceiling issues in the first six months of the year, consumers remain upbeat, and their confidence recovered somewhat in recent weeks. The housing market, on the other hand, has continued to encounter headwinds since late 2022, as rates stayed elevated and housing supply remained tight. With an increase in home building activity at the national level, we could see some slight improvement in market conditions in the U.S., but tight inventory will likely remain the norm in California in the second half of the year until rates start coming down meaningfully.
Economy stronger than previously thought but set for downshift in Q2: The U.S. economy expanded at a faster pace than previously thought in the first quarter. Real growth domestic product (GDP) – a measure of economic output – increased at an annualized rate of 2% in the first three months of 2023, instead of the 1.3% growth rate reported in the second estimate. The upward revision was largely due to an adjustment in consumer spending to 4.2% from 3.8% recorded earlier. With a stronger-than-expected economy in the first quarter, economists have lowered the odds of a recession for the U.S. Many, however, still believe a recession is more likely than not, and may arrive later than what was projected six months ago. Indeed, the latest data from a recent report released by the Bureau of Economic Analysis reflects that growth in personal consumption expenditures fizzled in May as consumers began to cut back on buying goods. Despite wage growth remaining solid, retail activity continued to be curbed by high inflation, and consumer spending is expected to downshift further in coming months.
Consumer confidence rose in June as recession fears fade: Americans were more bullish about the economy last month, as the Conference Board’s Consumer Confidence Index rose to the highest level in 17 months in June. Consumers’ assessment of current business and labor market conditions continued to improve and reached the highest level since June 2021. Their short-term expectation on those economic variables also posted the biggest gain since last August. With consumers feeling more upbeat about the job market and the outlook of their family finances, fewer of them now expect a recession in the next 12 months. Despite the increase in optimism, those who planned to buy a home within the next six months declined to 5.5% in June from 5.9% in May, as tight supply and high costs of borrowing remain significant headwinds for homebuyers.
Housing affordability dips as prices tick up: A bounce-back in home prices, coupled with higher mortgage rates, led to lower housing affordability in the second quarter. A report released by ATTOM shows that the typical portion of average wages required for major homeownership expenses has been pushed up to 33% last quarter, a jump from 29.9% in both the first quarter of 2023 and the second quarter of 2022. Quarter-to-quarter increases were observed in 94% of all 574 counties across the nation tracked by the report. With median home prices generally lower in the third quarter, housing affordability could improve marginally in the fall in some of these counties if interest rates stay put or come down after the summer.
New home sales reach 15-month high amid tight supply in resale market: New home sales climbed again in May and reached the highest level since February 2022. The surge of 12.2% in sales from the prior month was due partly to low housing supply in the resale market, as new home inventory at the national level remained at 6.7 months, while the existing home market only had an inventory level of 3.0 months in May. Incentives like mortgage rate buy-downs are also contributing factors that help push new home sales up, as over half of builders who responded to the latest National Association of Home Builders Housing Market Index survey offered such incentives. With interest rates remaining high and even begin to inch up in the last few days, financing costs for homebuyers will increase in the short term and will create headwinds for the market that may lead to a slowdown in new home sales in the coming months.
Construction spending heats up in May: Consistent with homebuilders’ improved optimism reported last week, total construction spending climbed for the fifth consecutive months and increased in May by 0.9%. Residential spending jumped 2.1% and registered the largest month-over-month increase since January 2022. The increase in single-family construction spending was particularly noteworthy, as it was the first monthly increase since after a year-long string of consecutive declines. Multifamily, on the other hand, continued to slow as rising vacancy rate in apartment rentals continued to put downward pressure on new construction activity. Private multifamily outlays, in fact, declined 0.1% in May from April, registering its first monthly dip in 10 months. Nonresidential spending also waned as private construction on commercial and healthcare pulled back by nearly 2% in May.