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. 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. 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. 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 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.
Inventory, sales, and new listings rose over the past four months. The number of home sales is, in part, a function of the number of active listings and new listings coming to market. Even though all those metrics are far below typical levels, these trends are all signs of a healthier market. Currently, inventory is still quite low relative to demand, so 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. Since January, sales jumped 116% while new listings rose 63% with home prices rose 20% in Alameda and 17% in Contra Costa.
As buyer competition has ramped up and sellers are gaining negotiating power, sellers are receiving more of their listed price. In January 2023, the average seller received 95% of list price compared to 104% of list in May. Inventory will almost certainly remain depressed for the rest of the year, and the market will likely only get more competitive in the summer months.
As always, Arrive Real Estate Group remains committed to helping our clients achieve their current and future real estate goals. Our team of experienced professionals are happy to discuss the information we’ve shared in this newsletter. We welcome you to contact us with any questions about the current market or to request an evaluation of your home.
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