This article is from the California Association of Realtors. https://www.car.org/marketdata/marketminute

March 06, 2023 – While the Fed’s hawkish interest rate policy was expected to slow the economy and inflation, recent data continues to suggest otherwise. Despite the ISM services index slowing from the previous month, the service sector still expanded and is keeping pressure on prices. The labor market remains tight and is still not showing signs of deterioration with new weekly jobless claims remaining under 200,000 for the seventh consecutive week. This is supporting consumers’ views on their current situation. However, they are growing weary of what lies ahead. In the housing market, builders continued to scale back on new development, with residential investment in single-family homes down 1.7% in January. Moreover, with the average rate for a 30-year fixed mortgage rising 52 bps since the end of January, mortgage purchase applications fell to a 28-year low this past week. As demand remains soft, home prices are expected to soften as well, which will help improve affordability.

Mortgage loan activity declines as rates hit 4-month high: According to the Mortgage Bankers Association (MBA), total mortgage loan application volume as of February 24, decreased 5.7% form the week prior. This was the third consecutive weekly decline in mortgage loan activity after a brief resurgence in January when rates hit their lowest level since November 2022. However, rates have inched up more than 50 basis points over the past month as sustained economic growth and continued inflation reduce the possibility of the Fed loosening up its monetary policy anytime soon. With rates topping a 4-month high and nearing 7%, refinance activity has shrunk significantly and purchase applications have fallen to a 28-year low as potential homebuyers once again retreat to the sidelines.

Construction spending weakens, decline in residential overshadows nonresidential gain: Total construction spending remains above last year by 5.7%, though it continues to slow down as it fell 0.1% from December. Despite the nonresidential sector advancing 0.3%, total construction spending continues to be dragged down by a much weaker residential sector, which dipped 0.6% during the month and marked its eight consecutive decline. Residential spending is running 3.8% behind the same month of last year, mostly as a result of a 1.7% decline in single-family construction spending – offsetting growth in multifamily (0.4%) and home improvement (0.3%) spending. Compared to a year ago, spending on single-family construction was 18.4% lower and is consistent with a pull back on new home building as rising interest rates cool the housing market.

Consumers’ expectations weigh down on confidence: Consumers’ confidence waned further as the Conference Board’s Consumer Confidence Index slipped 3.1 points in February. While a tight labor market supported more optimistic views on their current situation, persistent inflation and growing concerns about the future are increasingly worrying consumers about what to expect moving forward. The portion of the index that tracks consumers’ views of current conditions improved to a 10-month high as majority (52%) of consumers reported jobs were “plentiful” – the highest share since April of last year. However, as Americans continue to face high prices and elevated borrowing costs, consumers grew less certain about the future and took a toll on the expectations portion of the index, which slipped 6.3% and dragged down overall index. Confidence has now fallen in 4 of the past 5 months.

Jobless claims remain historically low, pointing to a still strong labor market: The number of Americans filling new claims for unemployment benefits fell again last week as they dropped 2,000 to a seasonally adjusted 190,000 for the week ending February 25. It was the seventh straight week that claims remained below 200,000 pointing to a strong labor market that continues to show minimal signs of deterioration despite efforts by the Fed to cool the economy, loosen the labor market and tame inflation. California and Kentucky led the decline in jobless claims, though they were also notable decreases in Michigan, Ohio and Texas. Massachusetts and Rhode Island had big increases.

Service sector expands and keeps pressure on prices: After the services index by the Institute for Supply Management (ISM) had suggested a slowdown in the service sector when it dipped into contraction territory (below 50) at the end of last year, the index surprised many when it jumped back up to 55.2 in January. Contrary to expectations, the latest February reading of the ISM services index (55.1) did not slow down much from the previous month and showed the service sector continues to expand, keeping the pressure on prices. Of the subcomponents, business activity index slipped more than four percentage points to 56.3, but employment was the biggest winner as it jumped from 50 to 54 – the fastest pace of payroll activity expansion since 2021.