Banking analysts and economists are starting to cry recession again, as the Fed is faced with a longer road than anticipated to lower inflation. Over the past year, the Fed has raised its benchmark rate by 4.5% and shrunk its balance sheet by over $600 billion. At a minimum, we expect the Fed to raise its target interest rates to 5.25% by the end of the year, which will only happen if they continue to raise rates by 0.25% over the next three quarters. There is a very real chance that rates will move higher than 5.25% because the Fed has such limited tools to combat inflation. The economy is still in the early days of disinflation — a temporary slowing of the pace of price inflation — and the Fed has indicated that they’ll keep rates high until inflation is under control. This uncertainty around interest rates has hit the housing market especially hard.
Mortgage rates have been volatile, making it more challenging for buyers in terms of financing and affordability. Historically, the spread between the 10-year U.S. Treasury Securities and 30-year mortgage rates has been around 1.8%. Currently, 10-year treasuries are yielding 4.08%, while the average 30-year mortgage rate is 6.65%, a spread of 2.57%. Buyers and sellers are still getting used to the dramatic mortgage rate hikes that started in early 2021. Even looking back one year, the price difference is substantial. When we account for the 5% year-over-year increase in median price per square foot of a home in the United States, plus interest rates rising over 2.5%, the monthly cost to finance a home rose by 41%. Looking back two years, the monthly cost has risen by 81%.
The housing market has done what you’d expect of any market when cost rises so rapidly: It slowed down substantially. The number of home sales in 2022 was exceptionally low, and we expect sales to remain low in 2023, since mortgage rates will likely stay between 6 and 7% on average for the rest of the year. Additionally, the number of active listings remains historically low but isn’t as large of a concern as it was in 2020 and 2021 due to the large drop in demand.
We do want to be clear that the housing market isn’t in a recession, nor is the rest of the country. Still, potential homebuyers, and consumers overall, have far less buying power than they did in the very recent past. The broad economy is still expanding, the unemployment rate is at a 53-year low, and wage growth has been substantial, making a full recession unlikely in the near future. Homebuyers can expect a less competitive market but must continue to be decisive, as desirable homes are still selling quickly.
Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage of your area. In general, higher-priced regions have been hit harder by mortgage rate hikes than less expensive markets due to the absolute dollar cost of the rate hikes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.
Big Story Data
The Local Lowdown
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Active listings in Orange County dropped further in February as fewer listings came to market, causing inventory to land near all-time lows.
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Single-family home prices were stable, while condo prices rose meaningfully month over month, signaling that low inventory and seasonality are still affecting pricing despite higher mortgage rates.
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Months of Supply Inventory declined as sales increased and homes sold faster month over month, indicating the market has moved back to a sellers’ market.
Note: You can find the charts/graphs for the Local Lowdown at the end of this section.
Typical and atypical seasonal trends
This time of year, we usually see both inventory and sales increasing steadily through mid-summer. Inventory is able to grow, even with increasing sales, due to the relatively high number of new listings that come to market in the first half of the year. However, the number of new listings actually decreased from January to February, which is an early sign that inventory will struggle to grow this year. Although we expect sales to be more muted this year, demand could start significantly outpacing supply, especially if sales continue to rise without being met by more new listings. Even with higher mortgage rates, Orange County is experiencing greater demand than the rest of the state for a couple of key reasons. People simply want to live in beautiful Orange County, and homes are still somewhat affordable, which translates to more market participants.
Orange County real estate has proven to be one of the most stable and resilient markets in the country. Single-family home prices have increased 17.2% over the past two years after declining 11.7% from the April 2022 peak. Condo prices have only declined 5.8% from the May 2022 peak, increasing 22.0% over the past two years. Homebuyers in Orange County and Southern California can actually find a home within budget, which allows for a conventional loan to finance the purchase, and they can expect to refinance at some point in the future, which will decrease their monthly costs. The next three months will give us a clearer picture of how buyers and sellers are reacting to the current market conditions, but early signs point to more competition in Orange County as we enter the spring season.
Inventory near record low
Single-family home and condo inventory declined near all-time lows in February 2023. Higher interest rates have dropped incentives for potential sellers to enter the market, since sellers usually also must buy a new home. Homeowners either bought or refinanced recently, locking in a historically low rate, which means they aren’t selling and fewer listings are coming to market. Many potential buyers were priced out of the market as interest rates rose; however, interest rates have been higher for enough time that buyers are more comfortable re-entering desirable markets like Orange County. Currently, buyers aren’t facing anything similar to the hypercompetitive 2021 market, but we will likely start to see more competition among buyers in the spring. New listings and sales both fell by 28.8% year over year. We still expect some inventory growth in the first half of 2023, but inventory will likely remain low.
Months of Supply Inventory dropped, indicating a sellers’ market
Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The long-term average MSI is around three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). MSI dropped in February for both single-family homes and condos, indicating the market favors sellers. The sharp drop in MSI occurred because homes sold more quickly and fewer new listings came to market.
