January 23, 2022 – As the new year gets underway, Americans are financially preparing for challenges in 2023. Despite inflation slowing towards the end of last year, consumers are managing their spending more closely and showed restraint from overspending during the holidays. Economic data suggest this will continue in the short-term. Housing demand remains relatively depressed as affordability remains a challenge, but lower mortgage rates and softer home price appreciation may help to bring buyers off the sidelines and California saw a modest increase in sales activity in December along with an uptick in mortgage loan activity. These positive improvements in the housing market helped to boost builders’ confidence in January.

Interest rate reprieve bolsters December home sales: Sales of existing single-family homes in California remained below the 250,000 level for the second straight month and dropped 44.1% on a year-over-year basis. However, a short respite in rising interest rates helped edge up home sales at the end of the year to break a three-month sales decline. December’s uptick in sales shows buyers and sellers are gradually adapting to the new normal and shifting to a more balanced market. Although a tight housing inventory has kept home prices from free falling, with the median price for a single-family home in December slipping 0.4% from November and 2.8% from a year ago, prices and rates are both expected to decline in 2023, which should improve housing affordability this year.

Mortgage applications increase as rates continue to moderate: Mortgage application activity rebounded strongly in the first full week of January as mortgage rates continue to dip. The Market Composite Index measuring mortgage loan applications for the week ending January 13 increased 27.9% on a seasonally adjusted basis from one week earlier. Despite recent gains of more than 30%, refinance activity remains more than 80% below last year’s pace and purchase volume remains 35% below year-ago levels. However, with the 30-year fixed-rate mortgage (FRM) continuing to decrease in Freddie Mac’s weekly survey to 6.15% – the lowest since September of last year – mortgage activity should continue to improve.

Builder confidence improves as buyer demand rebounds: After 12 months of consecutive monthly declines in builder confidence, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) rose four points in January to 35. Builders continue to struggle with supply chain disruptions, higher construction costs, and labor shortages, but an uptick in buyer traffic and buyer demand as a result of lower interest rates has lifted their confidence for the first time in a year. Despite, the index remaining near all-time lows, all three components of the index showed modest improvement and provide hope that cycle lows for permits and starts are coming into view.

Housing starts fall, but building permits for single family edge higher: Total housing starts fell 1.4% in December and although it was a more mild drop than the downwardly revised 1.8% drop in November, it pushed the cumulative annual unit pace for 2022 to 1.553 million units. This was a 3% annual decline in housing starts and the first annual decline since 2009. Single-family housing starts had a surprisingly strong month, increasing by 11.3% from November as a result of unseasonably warm weather and improved building material availability. Compared to last year, however, single family starts were still down 10.6% in the first annual decline since 2011. Looking ahead, housing permits dropping for the eight consecutive month, points to further weakness in construction over the short run, but lower mortgage rates appear to be boosting builder confidence to start 2023.

Retail sales shrink by most in a year as economy’s growth engine weakens: Although inflation has been easing in recent months, consumers continue to grapple with higher prices which led to them cutting back in spending. Retail sales fell 1.1% in December, recording the largest monthly decline since December 2021. Nearly every category saw sales drop from the prior month. Up to this point, consumer spending had remained robust despite inflation, rising interest rates, and recession fears. However, dwindling savings and mounting consumer debt suggest that spending activity may be losing steam and that the economy will have a tough time maintain the same level of momentum going into 2023.