California housing market overview remains optimistic

The California Association of Realtors indicates economic reports suggest inflation continues to cool from last year but may remain sticky in the short term. As a consequence, mortgage rates have been moving mostly sideways in the past couple of weeks. With the labor market easing and consumers spending less since the start of 2024, the economy could see a slowdown in the months ahead. Since it is widely expected that the Federal Reserve will not cut its policy rate in its upcoming meeting, C.A.R. expects mortgage rates could begin to trend down towards the end of the second quarter if the economy continues to slow.

The latest C.A.R. weekly analysis is based on the following indicators:

Consumer confidence dips for the first time in three months:

Consumers’ attitude towards the economy took a step back in February, as the Conference Board’s Consumer Index fell 4.2 points to 106.7 last month, declining for the first time since November 2023. Less optimism in the labor market could be driving the decline in consumer confidence, as 13.5% of consumers viewed jobs as “hard to get,” up from 11% in January.

According to C.A.R., the recent rising trend in interest rates could have affected how consumers feel about the economy. Concerns over the U.S. political environment may also be another reason for the decline in the optimism.

Mortgage rates remain elevated:

The Fed wants to see more evidence that inflation is slowing consistently and could wait until the second half of the year before making any rate cuts. As a result, mortgage rates could remain elevated at the start of the homebuying season.

Personal income is up but consumers are spending less:

Americans were making more in January. Month-overmonth personal income growth jumped 1%, recording the highest increase since July 2021. Strong wage growth (0.4%) in January, gains in rental income (+1.6%), receipts on assets (+2.1%), and cost-of-living adjustment to Social Security also contributed to the rise in personal income. Despite the increase in income, consumers are still spending less after adjusting for inflation.

Construction spending fell in January:

Construction spending in the U.S. started off the year slow. Harsh winter weather likely played a role in the decline. January’s weakness concentrated in the nonresidential sector.

“Single-family construction showed gradual growth across much of the nation in the fourth quarter compared to the previous quarter, and this positive movement corresponds with our latest builder surveys,” said NAHB

Chief Economist Robert Dietz in a statement last week. “Meanwhile, new multifamily building in large, metro suburban counties posted a negative growth rate of 20% in the fourth quarter, reflecting the tail end of an apartment building boom that reached its highest level in more than 50 years.”

With vacancy rates likely to climb as more new apartments are expected to be released this year, C.A.R. expects multifamily construction to pull back further this year.

Optimistic California market overview.

In a recent housing market update to California Realtors, C.A.R. Deputy Economist Oscar Wei reported that January active listings in California increased from over a year ago for the first time in 19 months. He indicated this is an encouraging sign that the housing supply in the Golden State might have bottomed out at the end of last year.

“While we’ll likely experience some ups and downs in sales and housing inventory in the coming months as rates continue to fluctuate, the lending environment is expected to be more favorable in 2024. As such, market conditions should slowly improve throughout the next months,” said Wei.