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January 10, 2022

 

The U.S. economy is kicking off the new year with a slow start, with COVID cases surging and supply constraints remaining an issue. High inflation may also be putting pressure on the Fed to raise rates sooner than previously thought and the additional cost of borrowing could put more affordability burden on potential homebuyers who want to purchase in 2022. Despite these challenges, the California housing market is still expected to have a solid year as the economy recovers further and consumer desire to buy remains elevated.

California Housing Sentiment Improved in December: Housing consumers felt more positive about buying and selling as the seasonal slowdown kicked in in December. The share of consumers surveyed who thought it was a good time to buy a home in California rose from 18% in November to 22% in December, while the percentage who thought it was a good time to sell a home inched up to 74% in December from 72% in the prior month. With the bidding war easing slightly while interest rates remaining low at the end of last year, the housing sentiment was lifted at least temporarily as buyers took advantage of the off-season market.

Homebuilding Lifts Construction Spending: Despite shortage of building materials and labor, construction activity continued to improve. U.S. construction spending increased 0.4% in November, with residential spending increasing 0.9% during the month. Single-family homebuilding shot up 1.2% but outlays on multi-family housing projects dipped 0.3%. Overall constructing spending is now up 9.3% on a year-over-year basis, but part of the increase is attributed to the rising cost environment. The Producer Price Index (PPI) for construction materials, for example, jumped 1.5% in November. Supply constraints could ease later this year but will remain an issue in the short term as COVID continues to pose a threat to the public health.  

Omicron Continues to Spread as California Numbers Remain Elevated: The fast-spreading omicron variant continues to disrupt schools, government, and other daily activities, as California COVID numbers remain near record highs. After hitting a record 177 confirmed cases per 100k residents last week, the 7-day average dropped down to 145 as of Jan 10, 2022. Despite the recent slowdown, the rate was still higher than the average of 106 recorded a year ago. California’s positivity rate also set another all-time record, climbing to 22.3% on Jan 6 and was significantly higher than the 7-day rate of 15.8% recorded last year. While the omicron variant is more transmissible than other variants, research shows that it sends a lower proportion of infected people to hospitals with severe illness.

Unemployment Rate Drops but Payrolls Increase Less than Expected: A massive surge in COVID cases slowed U.S. hirings at the end of 2021, with nonfarm payroll rising only 199,000 in December, far fewer than expected by the consensus. Worker shortage is a constraint to employment growth, even before the recent increase in Omicron infections, and a more sustainable growth in the labor market is only possible in a post-pandemic environment. Nevertheless, job creation still totaled 6.45 million in 2021, the highest gain on record going back to 1940. The unemployment rate declined to a pandemic low of 3.9%, while average hourly earnings surprised on the upside with a 4.7% gain year-over-year. The jump in wages is likely putting more pressure on the Federal Reserve to raise rates sooner in 2022.

Interest Rates Increase to Highest Level in Two Years: With inflation rising at the fastest pace since 1982, mortgage rates had been gradually rising since August, but the narrative seemed to have changed drastically in recent weeks. The average 30-year fixed rate mortgage jumped to the highest level since May 2020 during the first week of 2022, and the daily average continued to rise sharply in the last few days. Despite a surge in COVID cases since late last year, the U.S. economic growth is expected to be solid this year, while higher inflation and tight labor market will remain issues in 2022. The Fed has already accelerated their tapering process, and many market participants now expect the first rate-hike to begin in late Q1/early Q2.

 

Weekly Data for WE 2021-12-11

 


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