June 10, 2024 – The ongoing strength of the U.S. economy continues to drive severe volatility in the bond market that impacts 30-year mortgage rates and, thus, the housing market here in California. 10-year Treasury rates have surged in the wake of last Friday’s jobs report, which showed more than 270,000 net job gains and daily mortgage rates have jumped back near 7.2%. The services sector, which has seen the strongest demand over the past 2 years, continues to grow and remains plagued by a lack of available workers, which is keeping wage growth and inflation elevated. Fortunately, more listings have been coming onto the market in the past few months despite many homeowners facing rate-lock after buying/refinancing when rates were below 3%. This has already helped home sales rebound from 2008 financial-crisis levels through April, and sales should continue to rise through the end of the year notwithstanding the caveat that the market will remain volatile.
Big jobs number spooks bond traders, but hides some underlying cracks: Last month, the U.S. economy expanded by a net of 272,000 new jobs, which blew past the expectation of fewer than 200,000 jobs created. Financial markets have met these results with angst as the hoped-for slowing in the economy that might enable the Federal Reserve to begin cutting rates has continually failed to materialize. However, the strong jobs numbers from the “employer survey” that we see each month mask some underlying weakness in the labor market being reported in the “household survey,” which has been flat or negative for much of the past year. The household survey, which is weighted toward small business more heavily than the employer survey, showed an acceleration in job losses that suggests the labor markets may not be as strong as the headline numbers would have us believe.
Rates surge as economy refuses to cool: Although the strong jobs reports masks some of the underlying weakness that is beginning to show in the labor markets, the bond market reacted strongly to the latest jobs report and demand for 10-year Treasuries fell pushing bond prices down, thereby increasing bond rates. As the timeline for the first Fed rate cuts get pushed out after each strong data release, bond investors pull back as they attempt to time the market and get in when rates are at their peak so then can sell them on the secondary market when they begin to fall. As a result, the latest pull back drove the 30-year fixed-rate mortgage close to 7.2% at the time of this writing. And, although C.A.R. has not ruled out a rate cut for 2024 yet, the pace of decline in mortgage rates will be modest regardless given a long-term projection of a 2.5%-3% Fed Funds Rate.
Home sales holding up remarkably well despite noisy rate environment: Home sales in California, although sensitive to modest rate changes, have held up remarkably well in this volatile environment. After hitting a low-point of roughly 225,000 units last winter, sales bounced back to a 275,000-unit pace in April and preliminary indications are that May should maintain a similar level of sales. The top end of the market (homes priced $1 million and above) are significantly outperforming the entry level, both due to more available inventory at the top end of the market and the overperformance (economically) of high-income earners in California. Regionally, there is very little variation between north and south; urban/metro and rural; coastal and inland—highlighting how much of today’s housing market is influenced by macro, rather than local-specific factors. The current forecast expects sales to continue to trend up, breaching the 300,000 benchmark again by the end of the year, but the highs reached in 2021 are still years in the future.
Housing supply keeps rising, but normal still a long way off: Although more than 2/3 of California homeowners secured a rate below 4% during the pandemic, which provides a significant disincentive for existing homeowners to move, inventory has been rising throughout 2024. Facing higher rates now is certainly one factor in deciding whether to move, but many life events have been accumulating in California since many of these homeowners achieved such low rates. For example, California has seen nearly 1.7 million babies born since 2020. More than 1.2 million Californians have died since the pandemic as well, and a net of over 1.1 million people have moved out of the state during this time. In simple terms, many people are in homes that don’t work for them as well as they used to, and they are deciding to change gears despite the higher rates. This is the main factor that drives our forecast for higher sales this year, but it is also important to temper our optimism because inventory has only rebounded to 2020 levels and a tight market will remain the norm.
The service sector results suggest consumers aren’t done spending yet: The primary indicator of service-sector bounced back sharply in May after a decline in April. Both ‘business activity,’ a measure of current demand, and ‘new orders,’ which measure future demand, rose last month as the index posted its largest gain in nearly a year and a half. In addition, prices paid for services continued to rise, which is important for the Fed as service-sector inflation has been lagging the decline in inflation on goods. Interestingly, service sector hiring was negative in May, as it has been for most of 2024, despite strong service-sector employment growth in the national employment survey. This may lend credence to the labor market weakness evident in the monthly ‘household survey,’ which has consistently fallen short of headline numbers.
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