Mortgage rates kicked off the new year with their highest level since early July. With consumers remaining resilient and the economy expected to grow moderately in 2025, the Fed is proceeding more cautiously with further cuts in the next 12 months. The bond market reacted accordingly to the Fed’s latest outlook and prompted rates to climb higher in the last two weeks of 2024. With the latest spike in rates, the housing market is seeing some softening at the end of last year as mortgage application activity began to slow. While a soft start in home sales in California looks likely for the beginning of 2025, the housing market is still expected to grow modestly this year with rates projected to decline steadily in the next 12 months.

Mortgage rates reach highest level since early July: Mortgage rates reached the highest level in nearly six months to start the year, according to results from the Freddie Mac’s Primary Mortgage Market Survey released last week. Rates have been rising since mid-December and the Fed’s latest rate cut did not alter the direction of the rate movement. In fact, rates actually jumped abruptly higher after the December FOMC meeting, as the central bank’s latest outlook and dot plot indicate fewer rate cuts projected in 2025 than what was implied after the September meeting. Resilience in the job market, stickier-than-expected inflation, and policy uncertainty under the incoming administration are factors that contribute to the Fed taking a more gradual approach towards lowering rates in 2025. The 10-year Treasury yield had been rising steadily in the last two weeks of 2024, but began to show signs of stabilization at the start of the new year. With the December jobs report surfacing on Friday, yield movements will likely be observed in the coming days and some mortgage rates fluctuations should also be expected.

Consumers spent more money this past holiday shopping season: Consumers increased their holiday spending again this year, with U.S. retail sales – excluding automotive – climbing 3.8% year-over-year for the time period between November 1 and December 24, according to Mastercard SpendingPulse. Online retail sales were up sharply by 6.7% from a year ago, while in-store sales posted a more modest gain of 2.9% year-over-year. The restaurant sector recorded a big jump, with sales climbing a strong 6.3% from the comparable period a year ago, as consumers continue to value the dining out experience with family and friends. American shoppers also increased their spending on goods this year, with Apparel (3.6%), Jewelry (4.0%), and Electronics (3.7%) all showing decent growth from 12 months ago. Despite a shorter holiday shopping season this year, consumer demand remained solid until the end, with the last five days of the holiday season accounting for 10% of all holiday spending. As many consumers continue to lean on using their credit cards for their holiday purchases, credit debt could rise in the coming months. This could imply a pullback in consumer spending in early 2025 as bills come due for those shoppers who borrowed forward at the end of last year.

Insurers will be required to offer policies in high-risk areas under a new regulation: California Department of Insurance announced a new regulation last week that aims to increase homeowners insurance coverage in high-risk wildfire areas. The new regulation will require home insurers that do business in California to offer policies in areas that are prone to wildfires. To keep costs manageable for insurance companies, the state will allow them to pass on the costs of reinsurance to consumers, but these costs will be capped through an industry standard. The provision is a common practice that currently exists in every other state, according to the state insurance commissioner’s office. Insurance companies will be required to increase their policies in high-risk wildfire areas by 5% every two years until they hit the equivalent of 85% of their market share in the state. The new rule is currently under administrative review and is scheduled to take effect by the end of January.

Construction spending mostly unchanged in November: U.S. construction spending in November was virtually flat from the prior month but increased 3% from 12 months ago. For the first eleven months of 2024, total outlays rose 6.5% to $1,986.8 billion from $1,866.0 billion for the same time frame in 2023. Residential construction spending in November edged up slightly by 0.1% from the prior month, with single family construction climbing 0.3% month-over-month, while multifamily construction remained tepid with a drop of 1.3% from the prior month. On a year-over-year basis, both single-family (-0.7%) and multifamily (-9.5%) outlays continued their declining trend in November. With single-family starts and permits bouncing back at the end of last year, construction spending for the sector should remain healthy in early 2025. Multifamily outlays, on the other hand, will likely stay muted in the first half of 2025 but may improve at the end of the year, as new rental units coming online are expected to reach new lows by year-end.

New home sales bounce back in November: Sales of new single-family homes increased 5.9% on a month-to-month basis after reaching the 2024-low in October. The seasonally adjusted annual rate of 664k in November also marked an 8.7% rise from 611k recorded 12 months ago in November 2023. Sales in the South region rebounded with a double-digit growth rate as the region recovered from the hurricane season. Overall home sales, as such, increased solidly from the prior month and the same month of the prior year despite pullbacks in sales in both the West and the Northeast regions. But with mortgage rates jumping back to the highest levels since early July, new home sales will likely report a decline at the year-end when the data becomes available later this month. Meanwhile, new housing inventory dipped to 8.9 months after reaching a revised 23-month-high of 9.2 months in October. New for-sale units remained elevated and climbed 2.1% from the prior month and 8.9% from the prior year to 490k.

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California housing market bounced back in October and had the fastest year-over-year growth pace in sales in 40 months. Last month’s statewide median price also increased from a year ago and recorded the largest gain in the past three months. The supply condition improved as well with new active listings exceeding the year-ago level for the 10^th consecutive month. On the newly construction home front, builder confidence reached a 7-month high, and developers believed that the latest election outcome will provide regulatory relief for the industry in the coming years. The optimism will likely result in more housing units being built, which is encouraging news for the market.

Home prices in California record fastest growth pace in three months: California median price rose again in October as it increased from both the previous month and the same month of last year. The year-over-year gain last month was the fastest growth pace recorded in the past three months, and the 5.8% jump marked the sixteenth consecutive month of annual price increase for the Golden State. On a month-to-month basis, the median price increased 2.4% – the largest September-to-October increase in at least the last 45 years. It was also larger than the long-run average of 1.5% decline between those months. Home prices could soften in coming months as the market enters the traditional off-season but should continue to register year-over-year growth for the rest of the year.

Housing supply continues to increase in October: New active listings at the state level improved from a year ago for the tenth consecutive month in October. The pace of new listings was not only the highest since July of this year, but it was the ninth time in the last ten months that new for-sale properties increased by double digits. Consistent growth is a promising sign for the supply side, as 42 of the 52 counties tracked by C.A.R. increased in new active listings from October 2023. Sutter increased the most on a year-over-year basis with a jump of 57.8%, followed closely by Yuba (57.6%) and Calaveras (54.2%). Two counties were unchanged, and eight counties declined in new active listings from the same month of last year in October. Trinity (-28.6%) had the biggest drop, followed by Plumas (-21.4%) and Lassen (-13.0%).

Single-family rent growth remains positive but begins to fizzle: U.S. single-family home rent prices went up 2.0% year- over-year in September, the lowest rate since late 2023 and was below the pre-pandemic average of 3.5% recorded in the decade prior to COVID. According to the latest CoreLogic Single-Family Rent Index, rent growth for detached units increased 2.3% year-over-year, while attached properties went up more modestly by 1.5%. Rent growth on high-end units (2.6%) continued to outpace their low-end counterparts (2.5%) but decelerated slightly from 2.9% recorded in August. Of the metropolitan areas surveyed by CoreLogic, two of them recorded an increase of 5% or more, with Detroit (5.2%) posted the highest year-over-year increase, followed by Seattle (5%). Los Angeles (1.9%) continued to register a mild gain in rent prices in September, but San Diego (-0.7%) was one of the four metro areas that recorded a negative growth from last year. With many multifamily rental properties flooding the market in the past 12 months, single-family rent growth is expected to moderate further in the short term.

Housing starts fall sharply as hurricanes and rates weigh on construction: The U.S. Census Bureau reported a seasonally adjusted annual rate of 1.31 million units of housing starts in October, a drop of 3.1% from September and a fall of 4.0% from October 2023. Last month’s decline in construction activity was due primarily to the adverse impacts of hurricanes Helene and Milton, but the recent spike in mortgage rates might have played a minor role as well. The weather-related pullback was evidenced by a sharp decline in the South region where total starts dropped 8.8%, while housing starts in the Midwest and the West rose solidly. Single-family starts had a monthly decline for the first time in three months, with a drop of 6.9% from September. In the West region, however, single-family units continued to rise modestly at 4.6% but dipped 9.1% from the same month last year. Multifamily starts at the national level jumped 9.6% from September but continued to downshift from last year with a -12.6% growth rate.

Builder confidence improves to 7-month high: With the election uncertainty lifted and Republicans winning control of the White House and Congress, builder sentiment improved for the third consecutive month as they expect market conditions will continue to improve. The NAHB Housing Market Index, a measure that reflects builder confidence, increased three points to 46, the highest level since April 2024. While labor shortages and buildable lots will continue to be issues for developers, builders are feeling more confident as they believe regulatory relief for the industry will be forthcoming in the years to come. The latest survey also revealed that the share of builders cutting home prices dipped slightly from 32% in October to 31% in November. The usage of sales incentives also went down to 60% in the latest report from 62% in the prior month.

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The economy continued to do well last month with consumer spending remaining resilient and businesses turning more positive. Overall price level, meanwhile, inched up in October, but the Inflation rate was in line with economists’ expectations. With consumer prices rising only modestly in October, the Federal Reserve should remain on track to lower its policy rates again in the upcoming FOMC meeting. The outlook for inflation next year, however, is murkier than a few weeks ago as the election outcome has raised new questions about the path ahead for price growth. As such, the uncertainty is keeping mortgage rates elevated and could slow down the Fed’s rate cut pace in 2025.

Retail sales remain solid and gain momentum before the start of the holiday season: U.S. retail sales in October exceeded consensus expectations again as overall spending on retail and food services inched up 0.4% from the prior month and increased 2.8% from the same month of last year. While it was not as strong compared to the upward revised 0.8% monthly gain recorded in September, the latest reading beat the 0.3% growth rate expected by economists. Electronics and appliance stores (+2.3%) and auto sales (+1.6%) were the top two categories that pushed sales up solidly at the start of Q424. Consumers were also willing to spend money eating out as restaurants and bars rose 0.7% month-over-month, despite higher prices dining out. Several categories dipped in sales, nevertheless, including furniture stores (-1.3%), drug stores (-1.1%), and clothing outlets (-0.2%). The weakness in sales, however, could be partly attributed to last month’s hurricanes. With consumer spending generally remaining resilient in October, holiday sales in the upcoming months should be decent for retailers, even though the annual growth pace could be the slowest in the past three years.

Inflation meets expectation and remains sticky: The Federal Reserve should remain on track to lower its policy rates again in December as consumer prices rose modestly in October as predicted. The latest headline Consumer Price Index (CPI) went up 0.2% from the prior month and was up 2.6% from the same month of last year. Both the monthly increase and the yearly increase were in line with consensus expectations. The latest read on the annual figure was a slight uptick from September’s 2.4% annual gain in prices and continued to indicate slow progress on the inflation front. Excluding energy and food prices, the core CPI rose 0.3% for the month and inched up to 3.3% for the year-over-year growth rate. In general, core goods prices fell, but core services inflation continued to decline at a fairly slow pace. Housing inflation, in fact, spiked up on a monthly basis in October to 0.4% from 0.2% in September. On an annual basis, its inflation has declined to 4.9% from a peak of 8% in early 2023. Despite a slow grind in the inflation downward adjustment, the Fed is still expected to lower rates one more time in the next FOMC meeting in December.

Small business optimism climbed after the Fed’s rate cut: The NFIB Small Business Optimism Index climbed for the second straight month in October and tied with July for the biggest month-over-month increase in 2024. The index rose by 2.2 points last month to 93.7 and reached the highest level in three months. The jump in optimism was likely due to the Fed’s first rate cut since early 2020 and the expectations of the election outcome. Eight of the ten components that make up the index improved from last month, with the expectation on the economy to improve jumping the most by seven points. While small business owners’ optimism has improved, uncertainty also heightened as its index surged seven points to 110 – the highest level on record. With the election behind us, some of the uncertainty will be resolved as detailed policies are revealed, and owners will have more clarity on what might happen to taxes and regulations in the upcoming year.

Expectations on price growth and jobs improve: Consumers expectations on inflation at the short, the medium, and the longer-term horizons all declined in October, according to the latest New York Fed’s Survey of Consumer Expectations. At the one-year horizon, the median inflation expectations dipped 0.1 percentage point (ppt) from the prior month to 2.9% and reached the lowest level in four years. The 3-year ahead inflation expectations and the 5-year ahead inflation expectations also declined by 0.2 ppt and 0.1 ppt respectively from September. Results from the same survey also suggest that consumers’ expectations on the labor market improved, with the likelihood of losing one’s job in the next 12 months dropping 0.3 ppt to 13% in October. The mean perceived probability of finding a job if one’s current job was lost also increased by 3.3 ppt to 56% and reached the highest level since October 2023. With the economy remaining resilient and the labor market expected to stay healthy, optimism on jobs growth will likely stabilize, while short-term inflation expectations could climb in the near future.

Foreclosures tick up but remain relatively low: U.S. foreclosure activity inched up from last month, as filings went up 4% month-over-month but declined 11% from a year ago, according to ATTOM’s latest U.S. Foreclosure Market Report. A total of 30,784 properties in the U.S. had a foreclosure filing status in October, which was significantly below the peak observed during the 2008 housing market collapse when filings exceeded 300,000 per month. For the month of October, 20,950 properties in the U.S. started the foreclosure process, an increase of 6% from the prior month, and a decline of 10% from the same month in 2023. California had the fourth highest foreclosure rate among all states in the U.S., with one in every 3,152 housing units had a foreclosure filing in October. Areas in the state with the highest foreclosure rates include Vallejo (one in 1,464 units), Bakersfield (one in 1,640 units), Chico (one in 1,724 units), and Stockton (one in 1,802 units). With home price growth moderating but remaining positive, foreclosure activity is expected to remain steady.

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