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Most of the major macro indicators still point to an economy that is still trending towards target inflation with increasing signs that we will achieve the elusive “soft landing” scenario. The housing market in California continues to enjoy rising inventory and easing competition for available homes and pending sales suggest that buyers have begun to take advantage in spite of the typical seasonal slowdown that happens near the start of fall.
Inflation continues to trend toward Fed target: The latest reading on inflation for September shows headline CPI dipping to just 2.4% on a year-to-year basis. That is the lowest level since March of 2021 when inflation first ramped up and shows that the economy continues to make progress to the Fed’s 2% target for headline inflation. However, core inflation, which excludes certain volatile categories like food and energy prices, remains stubborn with only incremental progress of late due to high housing costs and ongoing wage growth owing to a strong labor market. Fortunately, the PCE Index, which is the Fed’s preferred measure of inflation over the CPI, has shown slightly better progress with core CPE growth dipping below 3% for the past 7 months consecutively and September data still to be released. As such, the market consensus now expects two additional 25 basis-point rate cuts in 2024.
Interest rates little changed as odds of larger rate cut in November shrink: Despite the relatively encouraging signs from the latest inflation report last week, rates remain elevated in the wake of a stronger-than-expected jobs report released a week prior. Freddie Mac’s average 30-year fixed-rate mortgage was 6.32% last week—it’s second weekly gain. Mortgage News Daily puts the current quotes closer to 6.6% at the time of this writing and the odds of a 50 basis-point cut at the next Fed meeting in November have fallen to zero after the jobs report despite nearly 1/3 of respondents still holding out hope for a larger cut just one week before. The economy still looks like it is on track to facilitate the cuts the Fed suggested after their September meeting, but expectations are adjusting to the reality of the likely 2 25 basis-point cuts rather than the 100 basis-points they had hoped for.
New inventory climbs as more homes enter escrow in California: There were nearly 49,000 homes available for sale on MLSs across California last week, which is within striking distance of the highest level of inventory since before the pandemic began. Importantly, homes priced between $400,000 and $800,000 have joined the higher-priced segments for 3 months of consecutive year-to-year gains in new listings. As rates begin to ease and first-time homebuyers dip their toes back into the market, this uptick in more affordable inventory will be critical. Initial sings from the first two weeks of October show that buyers are beginning to take advantage of the extra supply as pending sales have risen by double-digits compared with the first two weeks of October 2023.
Small business optimism improves but uncertainty reaches all-time high: The sentiment of small business owners ticked up last month, but the group’s uncertainty about the outlook hit the highest level on record going back to 1987. The NFIB Small Business Optimism Index climbed 0.3 points in September to 91.5 after a sharp pullback in August. Business owners felt slightly more positive as fewer of them were concerned about inflation and labor shortage last month when compared to the prior month. Despite the improvement in optimism, small businesses expressed more uncertainty than ever before, with the uncertainty index surging 11 points in September to a record-high 103. Business owners held back on capital investment and inventory building last month because of uncertainty, as the percent of owners reported capital outlays in the last six months dropped 5 points to 51%. The pollical unknowns, as well as the economic uncertainty, tied to the election will likely linger on until after November. With the Fed easing its monetary policy further in coming months, lower costs of borrowing and higher credit availability will hopefully alleviate some of those concerns.
More homeowners are drawing cash out from their equity: With home prices rising solidly in the past couple of years, more homeowners are tapping into their home equity at the fastest pace since 2008. According to a latest report from CoreLogic, lenders originated more than 333k new home equity loans with a total loan amount of $23.6 billion in the first half of 2024. Home equity counts were 40% higher than a year ago and the amounts were an increase of 69% year-year. The demand for home equity loans varied across the nation but several California major metropolitan areas experienced a surge in home equity loan activity so far this year. Seven of the top ten metros with the highest home equity loans amount in the first half of 2024, for example, were in California. Los Angeles had the highest amount during that period, with a total reaching nearly $1.88 billion, an increase of nearly six-fold compared to 2023. Anaheim, San Diego, Riverside, Sacramento, Oakland, and San Jose were the other metros on the list. With home prices projected to rise further in 2025 and mortgage rates expected to remain elevated, more home equity lending could be anticipated in the coming year.
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