June Gloom is real in California, especially for the past couple weeks, and it’s not only weatherwise. The housing market remains gloomy entering in June and for this market update, we dive into key insights and updates regarding the housing market. As the market eagerly anticipates the Federal Reserve’s decision on rate hikes in their upcoming meeting, concerns about inflation continue to impact mortgage rates.
Additionally, we explore how the Bank of Canada’s recent rate increase, unexpected jobless claims, foreclosure activity, and changes in home equity are shaping the market landscape. We also shed light on the growing trend of homebuyers searching for properties beyond their own neighborhoods. It’s a great reminder to all of us that macroeconomic environment is something we must be up to date as much as possible at all times in order to make smart real estate investing decisions.
Are We At The Peak of Interest Rate Rise?
Mortgage rates experienced fluctuations throughout the previous week due to the Bank of Canada’s decision to resume rate hikes. While this move initially applied upward pressure on yields, downbeat data on jobless claims reversed the trajectory, lowering the odds for a fed funds rate increase. Bank of Canada policymakers raised their policy interest rate by 25 basis points after pausing rate adjustments since January. Unfortunately, they also hinted at a similar increase in the upcoming July meeting. Yields reacted by jumping after the surprise announcement but reversed slightly when jobless claims data suggested potential headwinds for the economy. As the market awaits the release of inflation data and the Federal Reserve’s decision on a rate hike, interest rates are expected to remain elevated throughout the first half of the week.
As the result of high interest rate, jobless claims reached highest level since October 2021 earlier this month, according to a report by California Association of Realtor, with 261,000 individuals filing for unemployment benefits. This represents a 28,000 increase from the previous week, surpassing economists’ expectations, which had anticipated a 6% decline.
The spike was primarily observed in California and Ohio, with California reporting the largest increase of nearly 5,200 claims compared to the previous month as big tech companies are the major victims of the battle against inflation. Although it’s important to consider that a single week’s data does not establish a clear trend, the rise in unemployment claims during the current economic slowdown raises concerns about a potential recession. From a bond market standpoint, this also provides the Federal Reserve with another reason to consider skipping a rate hike in their upcoming meeting, which at this point, we really doubt they are stopping.
Similar Trend to the 2008/2009 Financial Crisis or Not?
If you are looking at real estate trends in any market, a very alarming sign is emerging: Foreclosure Activity Spikes but Remains Well Below the Great Recession’s Level. Foreclosure filings in May 2023 experienced a 7% increase compared to the previous month and a 14% increase compared to the same month last year, according to ATTOM Data.
These filings primarily resulted from states that had suspended foreclosures during the COVID moratorium issuing notices to homeowners who had fallen behind on mortgage payments. Despite this upward trajectory, the current foreclosure rate of 0.025% remains significantly lower than the peak of 3.6% observed in January 2011 during the Great Recession. For example, in the state of California, the nearly 2,500 foreclosure starts recorded last month were significantly below the peak of 135,000 observed in Q1 2009. While the rise in foreclosures will add some listings to the market, it is unlikely to have a significant impact on the tight supply conditions or home prices in the near term.
Additionally, Home Equity is declining as Prices Drop in Q1 2023, resulting in a year-over-year loss of 0.7% in home equity. This drop at the national level marks the first decline since early 2012. Approximately 2.1% of all mortgaged properties, equivalent to 1.2 million homes, were considered “underwater” in the first quarter of 2023. This represents a 4% increase compared to the same quarter of the previous year, although it remained unchanged from Q4 2022.
Despite this increase, the proportion of homes with negative equity remains relatively small when compared to the peak of 26% recorded in Q4 2009. Considering the likelihood that home prices reached their lowest point in Q1 2023, it is expected that aggregated home equity levels will improve in the coming year as prices continue to rebound.
More Homebuyers Search for Out-of-Neighborhood Properties
Housing affordability and accessibility to homeownership continue to drive shifting moving patterns, as indicated by a report released by Realtor.com. During the first quarter of 2023, nearly 60% of all listings page views from the top 100 metropolitan areas were for properties located outside of the viewers’ current neighborhoods. This represents a 4.1% increase from the previous quarter and a 3.3% increase from the same quarter in 2022. Of these out-of-metro viewings, two-thirds were in areas with higher homeownership rates than where the viewers currently resided.
Additionally, half of these viewings were in areas that were more affordable than their current locations. This trend can be attributed to high home prices and the growing prevalence of remote work, which enables homebuyers to explore markets beyond their own neighborhoods, offering greater housing affordability and fewer obstacles to homeownership.
My Personal Take
And just like that, the housing market remains gloomy as we are heading into the summer of 2023, which supposedly is the busiest season of the year. As the Fed does not show sign of slowing down its effort in the battle against inflation, we can expect similar results, if not more severe, within the next couple months.
Even though interest rate is considered decades high, the expectations between sellers and buyers are slowly narrowing. If any homebuyer has both purchasing power with a little bit of luck, you can start planning your next big move because home prices are predicted to rebound once the interest rate drops some time in the future. But for now, if you are missing one of the two, we advise you to continue to build up your cash cow or increase your puchasing power.
If you have any question, comment, or concern, feel free to reach out to our team at info@chadvorealestate.com.
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