March 27, 2023 – While home sales and employment in California continued to march forward in February, recent banking turmoil has increased uncertainty on many fronts, including the housing market.  Despite declines in long-term yields, ongoing pressures in the financial system could cause smaller banks to tighten lending standards and may have an adverse effect on housing demand. The Fed, nevertheless, enacted its ninth rate hike since March 2022 but hinted there might only be one more to come before the end of the year. Mortgage rates, as a result, slid for the second consecutive week and reached their lowest level in a month. This has motivated many buyers to come off from the sidelines as mortgage applications increased for the third week in a row.

More favorable interest rates perk up California home sales: The lowest mortgage rates in five months helped boost California home sales to reach above the 250,000-unit annualized sales pace for the first time in four months. February’s sales pace was up 17.6% on a monthly basis from 241,520 in January and down 33.2% from a year ago, when a revised 425,120 homes were sold on an annualized basis. Despite the third straight monthly improvement, sales of existing single-family homes in California remained below the 300,000-unit pace for the fifth consecutive month. A shift toward more home sales in the lower-price segments is expected to continue to further soften home prices. However, with the availability of homes remaining extremely tight and housing supply conditions not expected to improve any time soon, prices should find bottom later this year as interest rates stabilize.

New home sales climb for the third consecutive month: New home sales jumped 1.1% from January to a seasonally adjusted annual pace of 640,000 homes in February. While this was the third straight month of growth for sales – which suggests that the market might have already found its bottom, new homes remained 19.0% behind the same month of last year. Regionally, sales in the Northeast and Midwest saw a decline, while the South and the West grew by single digits. The uptick in sales pace in February chipped away 0.7% of the new home inventory, dropping the months of supply to 8.2 at the current sales pace. Builders are being cautiously optimistic however, despite mortgage rate volatility and economic uncertainty. The boost in builders’ confidence is likely attributed to the intensified market competition and solid price growth observed in recent weeks, resulted from more buyers turning to the new home market as supply remains tight in the existing housing stock.

Fed hikes rates by 25 basis points and indicates future increases are near an end: The Federal Reserve bank enacted its ninth rate hike since March 2022 by a quarter of a percent, taking the target range of its federal funds rate to 4.75% - 5%. After recent bank failures, there were doubts that the Federal Open Market Committee (FOMC) would continue with an aggressive stance in its rate movements. Fed policymakers confirmed last week that while they remain determined to bring inflation under control, it is too soon to determine the extent of the effects of the latest banking turmoil.  Additional information will be needed to make their next assessment, but the Fed suggested that there is at least one more rate hike before the end of the year.

Mortgage applications inch up as rates decline: Even though overall application volume remained at relatively low levels, both purchase and refinance applications increased for the third consecutive week as borrowers continued taking advantage of the lowest mortgage rates in a month. The Market Composite Index, a measure of mortgage loan application volume, increased 3.0% on a seasonally adjusted basis from one week earlier. Mortgage rates declined as uncertainty over the health of the banking sector and worries about the broader impact on the economy continued to grow. According to Freddie Mac’s weekly Primary Mortgage Market Survey® (PMMS®), the 30-year fixed-rate mortgage (FRM) averaged 6.42% as of March 23, 2023, down more than 30 basis points from its most recent peak at the beginning of March.

California job growth slows significantly amid tech layoffs: While California was the third of 44 states in the nation with the most increase in payrolls over the month of February, the 32,000 jobs added were roughly half of the gain experienced in January. Education & healthcare and leisure & hospitality registered the largest increases among major industries, though construction also added a notable 7,600 workers. The pace of job growth weakened significantly in the Bay Area however, as hiring cooled from 19,000 jobs added the month prior to 6,500 in February, amid a wave of thousands of job losses in the tech sector. The state unemployment rate inched up for the second consecutive month to 4.3%, as it bumped up from 4.2% in January, alongside a labor force expansion.

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