Real Estate Market Minute

Happy New Year!  The U.S. economy kicked off the new year with some good news that offers a ray of hope to the housing market. The latest report on solid job gains, coupled with slower wage growth, calmed down inflation worries and pushed mortgage rates down to nearly 4-month lows. Home purchase sentiment also improved in recent weeks as more consumers expected home prices and mortgage rates to decline in the next 12 months. Despite sluggish mortgage activities in December, it is time to put 2022 in the rear-view mirror. 

December jobs report eased rate hike concerns: Last month’s jobs growth slowed modestly from the prior month but remained strong at the end of the year with an increase of 223,000 in nonfarm payrolls. The unemployment rate also fell back to 3.5% and reached the lowest rate since 1969. Despite a higher-than-expected employment gain in December, wage growth came in at a slightly slower pace in November. On a year-over-year basis, the average hourly earnings climbed 4.6% at the end of last year, as compared to 4.8% observed in the prior month. The labor participation rate also ticked up for both prime-age and older workers, an indication that supply in the labor market is loosening up. It will take more than one report, however, to convince the Federal Reserve that wage growth is slowing and that inflation is easing on a sustained basis.

Mortgage rates reversed direction late last week: Mortgage rates moved up early last week but ended the week with a dip as the latest nonfarm payrolls report suggests weaker wage growth than expected in December. While Freddie Mac’s weekly 30-year Fixed Rate Mortgage (FRM) released last Thursday moved up from the prior week by six basis points (bps), the daily average 30-year FRM reported by Mortgage News Daily declined sharply after softer wage growth numbers were reported. Treasury yields ticked down as the wage component of the December jobs reports signals cooling inflation. The 10-year Treasury yield was down 16 bps, while the 2-year Treasury yield dropped 19 bps. At the end of last week, the rate futures market assessed a 67% chance for a 25-bps increase in the February FOMC meeting and another 25-bps hike in March.

Mortgage applications finished 2022 at a 26-year low: With mortgage rates climbing in the second half of December, mortgage applications declined 13.2% from two weeks earlier for the week ending December 30, 2022. The overall applications dipped to the lowest level since 1996. As rates remained nearly doubled what they were in 2021, purchased applications were down 42% from the same week a year ago and refinance applications declined sharply by 87% year-over-year. While rates could improve further in the coming weeks as inflation worries subside, they will likely remain elevated by the pandemic-era standard for the rest of the year. Housing affordability will continue to be a challenge for buyers and home sales activity will be soft for at least the first half of 2023.

Housing sentiment inched up at the year-end: After setting an all-time low in October and remaining unchanged in November, the Fannie Mae Home Purchase Sentiment Index climbed in December as home prices began moderating and mortgage rates started to ease. Mortgage Rate Outlook, Job Loss Concern, and Buying Conditions were three of the six components of the index that improved solidly and pushed the index up in December. The share of respondents who say it is a good time to buy climbed to 21% from 16% in the prior month but remained below the 26 percent reached a year ago. Those who say it is a good time to sell declined to 51% from 54% in November and from 76% in December 2022.

Overall construction spending bounced back, while residential remained down: Despite intensifying headwinds, builders and contractors unexpectedly increased total construction spending by 0.2% in November. The slight improvement was due to a 0.9% increase in nonresidential construction spending, primarily in the private sector. Residential construction spending continued to drop for the sixth month in a row in November, with single-family spending dropping 2.9% during the month. Multifamily, on the other hand, gained 2.4% from the prior month, reflecting a strong rental market that should remain solid in 2023.

What to keep an eye on:  Keep an eye on Fed's sentiments on inflation.  The market may find direction soon after the Fed is done with rate hikes at which time the mortgage rates could stabilize and buyers may be back.  Could it be back to the Sellers' market?

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