September 09, 2024 – The market has been relatively quiet in the lead-up to the Federal Reserve’s meeting on interest rates next week. Although recent economic data remains relatively strong, markets remain optimistic that the key policy rate will be cut by the Federal Open Market Committee. This has already begun to have a positive impact on the market as signs of homebuyer demand have perked up in recent weeks. However, prices continue to rise as well and that has helped to keep homebuyer sentiment restrained. The full benefit of lower rates will continue to play out in the coming months, but fortunately, the anticipated uptick in demand is also poised to be met with additional inventory, which is also slowly being unlocked as interest rates normalize.

Jobs data shows labor shortage shrinking: Two separate reports released last week show that the labor markets remain relatively healthy, but that the labor shortage that has driven much of the remaining inflation has eased. Headline job growth in the Commerce Department’s latest release came in at 142,000, which is slightly slower than during the first half of 2024, but remains in positive territory. At the same time, the report on job openings showed that there are fewer unfilled positions. In May of 2022, there were roughly 6.2 million more open positions than there was unemployed labor supply that was looking for a job. Last month, the shortage dipped to just 510,000 and was the first time the U.S. economy has been less than 1 million workers short since the economy reopened in earnest back in 2021. This should help inflation to keep trending toward the Fed’s 2% target as we approach the end of the year.

Interest rates continue their slide: As all eyes turn to the Federal Reserve’s Open Market Committee meeting next week, bond prices have risen in anticipation of a rate cut and mortgage rates have benefited from a strong treasury market in recent weeks. Last week, Freddie Mac’s average 30-year fixed-rate mortgage rate held steady at 6.35% and today’s daily quotes were down slightly more, averaging 6.27%. This represents a more than 100-basis point improvement in rates from a few months ago, though most of the benefit of the upcoming rate cut may already be priced into today’s mortgage rates. Notably, average rates for VA and FHA loans have already dipped below 6%, which should also help to generate additional housing inventory as the so-called lock-in effect diminishes somewhat.

Mortgage applications and pending sales: Although the level of mortgage applications and pending sales are still relatively low, compared with the decade-high levels reached back when rates were 3%, they are holding up much better to the seasonal slowdown than has been the case over the past two years. In fact, as rates came down in July and August, pending sales began to re-accelerate with preliminary analysis showing another double-digit gain in pending sales last month. In addition, September mortgage purchase applications are threatening to exceed the prior year figures for the first time since May 2021. Regionally, most parts of the state are within the margin of error, but the Central Valley slightly outperformed the Bay Area and the Far North in terms of housing demand last month, with Southern California and the Central Coast landing in the middle of the pack.

Construction activity continues to lose momentum: U.S. construction spending remain soft, with the total outlays dropping 0.3% in July. The decline was worse than consensus expectations, as economists had predicted a monthly decrease of 0.1%. Residential construction declined on a month-to-month basis for the first time in four months after revision on prior months’ data, with the latest drop attributed primarily to the weakness in single-family construction. In July, spending on new single-family dipped 1.9% from June, while new multifamily was essentially flat from the prior month. On a year-over-year basis though, new single-family remained sharply higher than a year ago by 7.7%. New multifamily dipped from 12 months ago by 6.7%. The pullback in overall construction spending was due again to elevated interest rates, despite the fact that rates started trending back down in early July. Lower interest rates should help revive builder sentiment in coming months, but housing permits from recent reports suggest that building activity will remain weak in the short term.

Homebuying sentiment stalls despite an increase in mortgage rate optimism: The Home Purchase Sentiment Index released by Fannie Mae inched up in August as consumers felt more positive about the mortgage rate environment. The share of consumers who believed that mortgage rates will go down over the next 12 months increased sharply by 10 percentage points from July’s 29% to August’s 39%. Meanwhile, those who expected home prices to decrease over the next 12 months increased moderately from 21% in July to 25% in August. Despite an improvement in the optimism in future direction of mortgage rates, the share who said that it is a good time to buy remained unchanged at 17% last month. With rates moderating to the lowest level since April 2023 and home prices expected to come down as the market transitions into the off season, homebuyers’ optimism will hopefully improve in coming months. Those who said that it is a good time to sell also remained flat at 65% in August. The stall in home selling confidence could be attributed partly to seasonal factors, but homebuyers staying on the sideline might also be a contributing factor. 

Note: The weekly market minute report is updated every Monday by 6:00 PM PST.