QUICK MARKET
ANALYSIS

Aug 26, 2024 – California home sales bounced back solidly in July, as prices moderated, and housing supply continued to grow from last year. While the rebound is not a V-shaped recovery, the turn-around is encouraging nevertheless, and offers hope that the boost in sales could kickstart the second half of the year. With the Fed signaling a policy rate cut in September and additional cuts to follow in the near term, mortgage rates will moderate further - albeit slowly- in the next couple quarters. Assuming that the economy will continue to slow but at a gradual pace, the housing market is expected to see more improvement in the next few months.        

 

Housing market kicks off second half of 2024 with a positive note: The housing market bounced back in July as mortgage rates moderated in June and continued the declining trend in July. Home sales in California increased 3.6% from the prior month and were up 4.1% from the same month of last year. The statewide sales figure climbed to the highest level since February and could rise further if rates continue their downward trend. The median price at the state level dipped below $900,000 for the first time in four months, but still recorded a year-over-year growth of 6.5%. Home prices will soften further in coming months as the market transitions into the off season. New active listings increased from a year ago for the seventh consecutive month, with at least 41 counties in California adding more for-sale properties than last year. With rates likely to soften further in coming months, housing supply should continue to see year-over-year growth in the third and fourth quarters.    

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New home sales reach the highest level in more than a year: Sales of newly constructed single-family homes in the U.S. increased by double-digits in July and rose to the highest level since May 2023, according to the latest data from the U.S. Census Bureau and the Department of Housing and Urban Development. The sales pace of 739,000 units recorded last month exceeded consensus expectation of 625,000 units, and the jump of 10.6% from June’s revised 668,000 units was the sharpest monthly gain since August 2022. New home sales also edged up 5.6% from the same month of last year and increased 2.6% on a year-to-date basis compared to the first seven months of 2023. On the supply side, the number of for-sale properties dipped to the lowest level in six months, with new home inventory declining to 462,000 units in July. The number of new homes available for sale dropped 1.1% from the prior month but continued to grow from the same month of last year by 8.2%. With mortgage rates declining to the lowest levels since May 2023 and the Fed signaling interest rate cut in the upcoming September meeting, home sales could continue to bounce back in both the new and resale markets in coming months.

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Housing affordability dips to lowest level since 2007: Housing affordability in California dipped in the second quarter, with the statewide index for existing single-family homes dropping 3 points quarter-to-quarter to 14% in the second quarter and declining from 12 months ago by 2 percentage points. High prices and elevated mortgage rates continued to keep borrowing costs elevated and pushed California’s affordability down to the lowest level in almost 17 years. The monthly mortgage payment for a median-priced home set an all-time high in the second quarter, surging 13.6% from both the prior quarter and from the same quarter a year ago as mortgage rates remained well above the year-ago level. Rates have moderated since July, however, and could soften further if inflation continues to ease in the next few months.

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Declining trend in single-family housing starts continues: Residential construction dropped sharply in July, with housing starts falling 6.8% from a month ago in the U.S., according to the latest data released by the U.S. Census Bureau. At a seasonally adjusted annualized rate of 1.24 million units, housing starts were down 16% from last July’s 1.47 million units. Last month’s decline in residential construction was due primarily to a slide in single-family starts, which pulled back 14.1% from the prior month and fell 14.8% from the same month of last year. Multifamily starts, on the other hand, registered a back-to-back monthly increase in July, but remained down more than 20% from 12 months ago. The expectation of relatively weak home sales was the primary factor for the decline in housing starts in the past couple of months. Builder confidence, in fact, dipped in August for the fourth consecutive month as developers’ concerns about future demand continued to grow, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Builders ramped up incentives in August with 33% of them cutting prices, the highest share so far this year. The sentiment should improve in coming months, however, as the Fed is expected to cut rates multiple times in Q3 and Q4, which should help lower interest rates and spur housing demand.         

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Consumers are still spending as July retail sales show strength: Despite a slowing job market, U.S. retail sales unexpectedly surged in July after a slight dip in the prior month. Sales of retail and food services increased 1.0% from the prior month to $709.7 billion after declining 0.2% (revised) in June, beating economists’ expectations of a 3.0% growth. Retail sales also increased 2.7% year-over-year last month and the solid gain calmed down fears of a U.S. recession at least temporarily. A jump in sales of autos and motor parts, along with a robust gain in electronics, provided a boost in overall sales in July. A bounce back in building materials and home furnishing also contributed to the increase in retail spending last month. Retail businesses that are tied to the housing sector had been struggling in Q2 but could see some improvement in coming months as rates begin to slow more consistently. The biggest question mark, however, is still the future of the job market. If the unemployment rate continues to climb, consumers will tighten their wallets a bit more for the rest of the year.