Quick Take:
Home sales fell 3.4% month over month as homebuyers faced volatile mortgage rates and sustained low inventory. Far fewer new listings have come to market this year and, in May, new listings were 24% below the long-term average.
The United States narrowly avoided a catastrophic and self-inflicted credit default, allowing the Fed to focus on the robust labor market and generally strong economy in an effort to decide whether to continue hiking rates.
Broadly, home prices have contracted slightly from the peak they reached in June 2022, but the steady rate increases have slowed down the housing market significantly, even compared to the years before the white-hot market of 2020-2022.
The labor market is too strong for a recession, so what’s the Fed to do?
We did it, gang! We made it through another debt ceiling crisis! The United States paid its bills in full and on time, avoiding default and a global economic catastrophe with two days to spare. This self-inflicted wound would have had far-reaching negative economic consequences in the near and long term, including far higher mortgage rates. Financial markets were mostly unbothered despite the fact that this Congress seems to be the most amenable to default. The 10-year Treasury yield rose a modest 0.4% in May, which translated to a 0.4% increase in the average 30-year mortgage rate. The S&P 500, which tracks the stock of the 500 largest publicly traded U.S. companies, reached a high for the year at the beginning of June, up 12% year to date. To be fair, a debt ceiling resolution that didn’t totally destroy the U.S.’s global standing was the most probable scenario. Now that the debt ceiling has been lifted until 2025, we turn our sights back to the Fed and interest rates.
During their last meeting, the Fed forecasted a potential pause in rate hikes after three sizable regional bank failures this year, but recent jobs data may swing them back toward a 0.25% increase. Increasing mortgage rates have primarily driven the housing market slowdown we’ve experienced over the past 12 months. Higher rates affect the housing market so strongly because housing is typically financed. Potential buyers have struggled with mortgage rate volatility over the past 18 months, as the average 30-year mortgage rate went from historic lows in 2021 (~3%) to a 20-year high (~7%) in November 2022. Luckily, rates contracted but have remained around 6.5%. Because home prices nationally haven’t contracted substantially from their all-time highs, small rate changes can make a huge difference in the cost of financing. The average 30-year rate hit a 2023 high at the start of June. However, we still expect rates to stay within the 6-7% band this year. At this point, continued rate hikes tell us more about the length of time rates will stay high, since the Fed tends to move in smaller steps over time. This means that, for every step up, there will need to be a step down, which will prolong the process of returning to lower mortgage rates.
The Fed has a tricky decision regarding future rate hikes. The broad labor market has shown its strength and seeming immunity to rate hikes. The monthly increase in employment from the U.S. Bureau and Labor Statistics has beat Wall Street estimates for the 14th month in a row. In May alone, 339,000 jobs were created, crushing the expected 195,000 jobs. At the same time, however, unemployment rose from 3.4% to 3.7% from April to May. Additionally, the first-quarter 2023 GDP data was revised up from 1.1% to 1.3% quarter over quarter. With this mix of data, we’re expecting a rate hike pause at the June meeting, but a hike again in July.
The housing market is in an interesting spot, where the economy is too good to lower rates but homes have become too expensive for potential buyers. Fewer sellers and buyers are in the market, so sales are unlikely to grow meaningfully this year.
Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. In general, higher-priced regions (the West and Northeast) have been hit harder by mortgage rate hikes than less expensive markets (the South and Midwest) because of the absolute dollar cost of the rate hikes and the limited ability to build new homes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.
Big Story Data
The Local Lowdown
In this Local Lowdown, we divide Los Angeles into three luxury real estate areas as follows:
North Beach, including the Pacific Palisades, Santa Monica, and Venice.
Westside, including Beverly Hills, Brentwood, West Hollywood, and Westwood.
South Bay, including Hermosa, Manhattan Beach, and Redondo.
Quick Take:
Year to date, North Beach price per square foot fell 11%, while the Westside is up 1% so far in 2023. South Bay prices have risen more substantially, up 21%.
Active listings rose slightly in North Beach and fell in the Westside and the South Bay. However, overall inventory remains significantly depressed, continuing a 15-month trend of low inventory and fewer than usual new listings coming to market.
Homes are selling more quickly, and sellers are receiving a greater percentage of asking price, both of which highlight the increasingly competitive environment for buyers.
Note: You can find the charts/graphs for the Local Lowdown at the end of this section.
Home price variability continues across markets
Home prices and inventory in luxury markets continue to buck seasonal trends, showing considerable variability month to month in terms of median price and average price per square foot. The unique homes, higher mortgage rates, and low inventory have all contributed to these volatile price trends. Inventory in the selected Los Angeles markets declined sharply in 2021 and has remained at depressed levels ever since. Low inventory helped keep prices from falling more substantially as rates increased over the past 15 months. The Fed announced rate hikes at the end of 2021 that would swiftly affect rates in 2022. The average 30-year mortgage rate rose 2% in the first four months of 2022, crossing 5% for the first time since 2011. That 2% jump caused the monthly cost of financing to increase 27%, so buyers rightly rushed to the market, which boosted prices. As rates rose higher, the market cooled and home prices fell in large part to accommodate the higher cost of a mortgage. Both supply and demand were lower than normal in the second half of 2022. However, in 2023, demand started to rise again despite elevated mortgage rates, but it wasn’t met with the typical number of new listings. The limited number of listings is especially challenging in luxury markets where homes sell in the millions of dollars. Homebuyers, understandably, only want the right home for their money. This year, the number of new listings has been significantly lower, which has greatly impacted sales. Typically, inventory grows in the first half of the year as new listings significantly outpace sales. At this point, inventory growth in the second half of the year can’t make up for the continued inventory stagnation across the selected markets, keeping supply of homes and, in turn, sales historically low for the rest of the year.
Inventory fell further as sales rose from April to May
Inventory has been depressed across markets since January 2022. Sales and new listings grew from April to May, but sales far outpaced homes coming to the market with a 13% rise in sales versus a 1% increase in new listings. That said, sales and new listings are both significantly lower than last year. The number of home sales is, in part, a function of the number of active listings and new listings coming to market. Even though new listings are at a depressed level, they are increasing, positively affecting sales. Currently, inventory is so low relative to demand that far more new listings could come to the market. Potential sellers who have fully paid off their property are in a particularly good position if they don’t have to finance their next property after the sale of their home. Buyer competition is ramping up as fewer listings come to market, and sellers are gaining negotiating power. In May 2023, the average seller received 6% more of their asking price in North Beach, 1% more in the Westside, and 4% more in the South Bay than at the start of the year. Inventory will almost certainly remain historically low for the year across the selected markets, but the South Bay is likely the only market that will get more competitive in the summer months. South Bay homes are generally less expensive than in North Beach or the Westside, which equates to more market participants, and therefore more competition.
Months of Supply Inventory indicates North Beach and the Westside favor buyers, while the South Bay favors sellers
Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The long-term average MSI is around three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). Luxury markets tend to have higher MSIs because there are fewer market participants. MSI has shown variability month to month as well this year, but the numbers show that the North Beach and Westside markets both favor buyers, while South Bay MSI tends to favor sellers.
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