The ongoing strength of the U.S. economy is generating volatility in the bond market , impacting 30-year mortgage rates and the California housing market, according to a recent report from the California Association of Realtors (CAR) .
The services sector, which has seen the strongest demand over the past two years, continues to grow, but is stymied by a lack of available workers, said the report. This is keeping both wage growth and inflation elevated.
Last Friday’s US Department of Labor jobs report, which showed more than 270,000 net job gains, has caused ten-year Treasury rates to surge, and daily mortgage rates have jumped back near 7.2%.
The supply issue is changing, however, said the CAR report, and more listings have been coming onto the market in the past few months. This is despite many homeowners facing rate-lock after buying or refinancing when rates were below 3%, the report noted.
Home sales have rebounded, however, from 2008 financial-crisis levels through April, and sales should continue to rise through the end of the year though the market is likely to remain volatile.
Thus, any slowing in the economy that might enable the Federal Reserve to begin cutting rates has failed to materialize, said the CAR report.
According to a May E-trade report, “At the beginning of 2024, bond yields, the rate of return they generate for investors, were near post-financial crisis highs—and for fixed-income portfolios, yields have historically served as a good proxy for future returns.
Morgan Stanley research shows a strong correlation (0.94) between starting yields for the Bloomberg U.S. Aggregate Index, which is a broad measure of investment-grade bonds, and total returns over the subsequent five years. The correlations are as strong or stronger when looking at returns over six to 10 years.
“In other words, said the E-Trade report, “at current yields, there is a significant opportunity for high-quality fixed income to generate attractive total returns—and reclaim its critical role providing income and portfolio diversification.”
Although the strong jobs reports hides some of the underlying weakness in the labor markets, the bond market reacted strongly to the latest jobs report and the demand for 10-year Treasuries fell, pushing bond prices down, and increasing bond rates.
Meanwhile, home sales in California, although sensitive to modest rate changes, have held up remarkably well in this volatile environment. After hitting a low-point of roughly 225,000 units last winter, sales bounced back to a 275,000-unit pace in April and preliminary indications are that May should maintain a similar level of sales. The top end of the market (homes priced $1 million and above) are significantly outperforming the entry level, both due to more available inventory at the top end of the market and the overperformance (economically) of high-income earners in California.
Regionally, there is very little variation between north and south; urban/metro and rural; coastal and inland—highlighting how much of today’s housing market is influenced by much smaller paraameters, rather than local-specific factors.
Said the CAR report, “The current forecast expects sales to continue to trend up, breaching the 300,000 benchmark again by the end of the year, but the highs reached in 2021 are still years in the future.”
The CAR report added, “In simple terms, many people are in homes that don’t work for them as well as they used to, and they are deciding to change gears despite the higher rates. This is the main factor that drives our forecast for higher sales this year, but it is also important to temper our optimism because inventory has only rebounded to 2020 levels and a tight market will remain the norm.”
