There's reason to be optimistic about the economy and the housing market, according to a new report released by the California Association of Realtors on July 17.

The Minute Market report, which offers the most up-to-date information on the economy and housing market and provides California Realtors key highlights and concise insights on industry-related issues each week, is upbeat regarding interest rates, consumer sentiment, the labor market and mortgage applications.

Here are some key takeaways:

Inflation continues to cool

Despite interest rates that remain near 7%, the economy has continued to perform well, according to the report. Last week (July 9-15), inflation cooled to just 3% on an annual basis – the lowest level in over two years.In 2022, inflation was approaching double-digits as the costs of goods and services rose. The report. indicates the cooling of prices in the service sector can be attributed to much of the economic growth consumers have enjoyed over the past few years, despite wage growth in this sector.

Some are hopeful with inflation down that the Federal Reserve will begin dialing back its aggressive monetary policy. Many others expect the Fed to raise the benchmark interest rate 25 basis points at least one more time. This would put the Fed Funds Rate at 5.5%, keeping mortgage rates elevated over the short term.

"Buyers appear to have modestly adjusted their outlook. Our market has grown more competitive as demand continues to outpace supply," Jim Hamilton, president of the Silicon Valley Association of Realtors, said.

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Consumer and business sentiments ramp up in July

Consumers remain relatively optimistic. The report indicates the University of Michigan’s index of consumer sentiment rose to its highest level in almost two years as fears of a recession fade and the labor market remains strong. The index shows consumers are more enthusiastic about their current economic situation and where they will be in a year economically. Nearly one-third of respondents expect their finances to have improved by next year.

Part of consumer optimism is due to a labor market where jobs remain relatively abundant, despite recent high-profile layoffs and an ongoing labor shortage. Business optimism also improved last month, driven mostly by reduced fears about a pending recession.

"This is the most anticipated recession, and so far, it hasn't happened. We hope it never will," Hamilton said. "We remain optimistic that whatever happens, California's housing market will pull though. It's a cycle that the market experiences and needs to go through in order to adjust itself because home prices skyrocketed for even above-average income families. They were definitely unsustainable. We're beginning to experience a more normal cycle, though prices are still driven by the shortage of homes to buy in our region."

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California labor market remains resilient

Despite a few high-profile company layoffs and job cuts, overall, California has continued to add jobs. The service sector has grown as consumers continue to spend at bars, hotels, restaurants and entertainment venues.

The California Association of Realtors report indicates there was an increase in new unemployment insurance claims at the beginning of April, which saw more than 50,000 new claims filed. This number is small relative to 2021 when new claims were reaching six figures per week and is well-below the numbers filed in 2020.

Since April, new unemployment claims have been below 50,000 per week for the past 13 weeks, consecutively. In addition, continuing claims, which measures new filings and ongoing claims, dipped to 374,000 last week. This is the smallest number of workers on unemployment insurance since November of 2022.

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Freddie Mac reports highest rates since November

Freddie Mac estimates for the average 30-year fixed rate mortgage rose to 6.96% last week, but since the latest inflation data, 10-year and 2-year Treasury Prices have increased as fears of continuing price growth have eased. The California Association of Realtors reports the yield curve remains inverted (this mean longer-term bonds have a lower yield than short-term debt instruments like treasury bills). but markets could be betting on a faster return to less aggressive monetary policy or even rate cuts next year. This has likely helped keep 10-year prices, in particular, relatively high.

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Have mortgage applications hit seasonal peak?

The number of mortgage applications dipped to 145, a 26% decline from the same period last year and an 18% decline from the previous week. The California Association of Realtors said mortgage applications typically peak in the spring (April-June), which pushes closed sales up in the subsequent months as buyers find and close on properties giving way to our typical homebuying season. Aggregating the weekly data shows that new purchase applications peaked in April of this year and fell in May and June in addition to last week’s dip.

"The following months will show if the trend continues. (The California Association of Realtors) points out that in recent years, the state's homebuying seasons have been running deeper into the fall. We may still see stable or even rising home sales as we get near the fourth quarter," Hamilton said.

Silicon Valley Association of Realtors (SILVAR) is a professional trade organization representing 5,000 Realtors and affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.

The term Realtor is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of Realtors and who subscribes to its strict Code of Ethics.

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