May 8, 2023 – Last week, the Fed enacted its 10th rate hike in its battle against inflation. They hinted that it may be the last but reiterated that much depends on incoming data as uncertainty on the health of the banking system and the overall economy amounts. Despite recent challenges, the labor market remains solid and added more jobs than expected. However, fewer job openings suggest that the 2-year labor shortage is beginning to normalize. Total construction spending increased, though single-family outlays continued to weigh on residential spending, which dipped for the tenth month in a row. Fortunately, California’s population decline slowed last year as births stabilized, deaths decreased, and foreign immigration rebounded.
Market activity picks up late into the spring home-buying season, tight inventory remains a challenge: According to C.A.R.’s monthly member survey, market activity is gradually increasing as is typical this time of the year. The share having listing appointments, entering escrow, and closing escrow all increased from the previous month. In fact, new escrows (22.7%) and closed sales (23.3%) were at their highest levels in seven and nine months, respectively. That said, while listing appointment rose from the previous month, the share of those who actually listed a property was unchanged from the previous month at 18.3% - highlighting the current headwinds for new listings and exacerbating the incredibly tight inventory in the resale market. Limited options for buyers created greater competition and more than one-third of REALTORS® witnessed 5+ offers made on a home – the biggest share in eleven months.
Total spending advances despite heightened economic uncertainty: Construction spending inched up 0.3% during March, translating to a 3.8% year-over-year gain. However, the increase in overall spending masked diverging trends between residential and nonresidential sectors as the improvement in the latter outweighed yet another decline in the former. Residential spending recorded its 10th consecutive monthly decline, dipping 0.2% during the month and maintaining its pace below last year levels by 9.8%. And, while multi-family and home improvement spending rose during the month, single-family activity continues to be the biggest drag on residential spending, decreasing 0.8% from February and running 22.9% behind a year ago. Builders cited high interest rates, inflation, and higher development costs as impediments to growth.
Fed raises rates by 25 bps and hints a potential end to hikes: The central bank’s Federal Open Market Committee (FOMC) approved its 10th interest rate hike of its benchmark borrowing rate by 0.25 percentage point, which takes the fed funds rate to a target range of 5%-5.25%. This is the highest the Fed Funds Rate has been since August 2007. After a little over a year of consecutive rate hikes the FOMC subtly suggested that the current tightening cycle has perhaps come to an end. However, with lingering concerns over economic growth and recent banking turmoil has rattled nerves on Wall Street and Main Street so it is not clear whether the Fed will truly pause here. The Fed acknowledged that while inflation has moderated somewhat, inflation is still the primary focus and pressures continues to run high. For that matter the path ahead will be dependent on incoming data and financial conditions.
Labor market remains tight despite recent directional slowdown: The U.S. economy added another solid 253K jobs to its payroll in April. While hiring in February and March were revised downward taking some steam away from the last couple of reports, the three-month average remains at a robust 222K pace. The ongoing strength of hiring is keeping the labor market tight even as the supply picture has improved in recent months. The labor force participation rate was essentially unchanged in April and the unemployment rate fell to 3.4%, on par with a 53-year low. However, hiring momentum has slowed and job openings have been trending lower, which suggests that the Fed’s intervention is beginning to cause the roughly 2-year labor shortage to normalize.
California’s population decline slows while housing grows: According to the California Dept. of Finance, the state’s population is estimated at 38,940,231 people as of the beginning of the year. Stable births, fewer deaths, and a rebound in foreign immigration were all factors that slowed California’s recent population decline in 2022. The 0.35% population decline for 2022, marked a slowdown compared to the recent decline during the pandemic between 2021 and 2022 were population decreased 0.53% or 207,800 persons. Meanwhile, statewide housing growth increased 0.85% in 2022 – the highest level since 2008. Although the ramped-up construction has helped, it is not enough to meet California’s population demands for housing to seriously reduce high rents and housing prices.