Note: The LAST Market Minute Write-Up of the year will be December 19. 

December 05, 2022 – While consumers and builders remained downbeat about the 2023 economic outlook, news on strong holiday spending and lower interest rates offered a glimpse of hope that the housing market may have found its footing and will begin to stabilize soon. With inflation remaining high but showing some signs of easing, the Federal Reserve is expected to raise rates less aggressively in the coming months, which should benefit both the economy and the market.

Mortgage rates drop after the Fed hints on smaller rate hike in December: Federal Reserve Chair Jerome Powell signaled in a speech last Wednesday that the central bank could raise the fed funds rate by 50 basis points in the upcoming December FOMC meeting, a step down from the 75- basis-point increases the Fed has been implementing in the past four meetings. In response to Fed Chair Powell’s comments, the 10-year note went down from 3.75% on Tuesday to 3.68% on Wednesday and dipped again to 3.59% on Thursday morning. Mortgage rates dropped sharply as a result, hitting the lowest levels since mid-September. The average 30-year fixed rate mortgage reported by Mortgage News Daily fell 34 basis points from 6.63% to 6.29% between November 30 and December 1. Stronger than expected November job growth released last Friday, however, dampened the recent rate improvement slightly. The Fed will have to think twice before making their next rate hike decision in mid-December.

GSE loan limit in high-cost areas will rise above $1M in 2023: The Federal Housing Finance Agency (FHFA) increased the 2023 national baseline conforming loan limit to $726,200 on single-family homes and raised the cap for high-cost areas to $1,089,300. The previous loan limits for 2022 were $647,200 and $970,800, respectively. With nearly one out of every four homes sold between $1.25 million and $2 million being purchased by first-time homebuyers in 2022, the higher limits will help make homeownership more accessible to Californians across the state and provide homebuyers with more financing opportunities.

Consumer confidence falls again as Americans take a gloomy view on the economy: Consumer confidence trended down for the second month in a row in November to 100.2, the lowest level reached since July. A flood of job-layoff news in recent weeks has created concerns for consumers on their job security, which in turn adverse-impacted their confidence on the economy. Consumers who expected more jobs to be available in six months declined to 18.6% from 19.5% in October, while those who expected their incomes to increase in six months dipped to 17.2% from 19.6% in the prior month. Both the present situation index and the expectation index declined month-over-month, suggesting more rough patches to come in the near term.       

Holiday spending strong as Black Friday lures shoppers back: Despite the negative outlook, Americans are still spending and kicking off the holiday shopping season with a solid start. Retail sales - excluding auto – were up 10.9% year-over-year during the Thanksgiving weekend, according to Mastercard Spending Pulse. Some of the growth, however, reflects higher prices and not higher volume, as the measure does not account for inflation. Despite inflation squeezing many shoppers’ budgets, holiday sales are still expected to be up between 6% to 8% over 2021, according to the National Retail Federation’s forecast. With the national saving rate dipping to 17-year low and credit card debt rising at the highest level in more than 20 years, consumers may not be able to sustain the solid spending growth for much longer though.

Homebuilding continues its slump in October: Construction spending continued to decline in October amid growing economic uncertainty and higher interest rates. Spending on private single-family homes dropped for the fifth consecutive month in October by 2.6%. The continuous decline was due primarily to developers’ concerns about market conditions as higher borrowing costs further curtailed home sales. Multifamily construction, on the other hand, held up well as the rental market remained strong. The sector’s spending was up 0.6% in October, an increase for the third month in a row. Construction spending will likely slow further in coming months as economic headwinds and higher financing costs continue to weigh on construction projects in the pipeline. Several forward-looking indicators such as the Architecture Billings Index and the Fed’s Senior Loan Officer Opinion Survey suggest a weak outlook in the coming year as well.