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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While Americans are heading to the polls to vote for the next President, state and local representatives, and a range of crucial local issues, the economy remains strong. The Federal Reserve, meanwhile, is ready to cut rates for the second time this year during their upcoming November FOMC meeting. Mortgage rates, after last week’s surge, stabilized while remaining above 7%. As a result, mortgage applications trended downward. The October jobs report was a mixed bag, with low job creation and significant data issues; other positive economic indicators meant the market did not react strongly to the weak report.

Anemic October job growth fails to ruffle the market: The labor market slowed more than expected in October, with the economy only adding 12,000 new jobs, after three months through September when the economy added an average of 148,000 jobs a month. The low figure is largely due to distortions in the data due to weather events, the now-resolved port strike, and the Boeing strike. Also balancing the low figure, publicly listed American companies reporting earnings showed a strong year, with earnings up 8.4% from a year earlier. As a result, the market did not react strongly to the small jobs figure, with the bond market actually inching slightly higher, the opposite of what would be expected after a weak jobs report. Wage growth picked up, with average hourly earnings rising 0.4% month-over-month and 4% year-over-year.

A solid GDP report shows the economy remains healthy: GDP rose at a 2.8% annual rate in the third quarter of 2024, down slightly from Q2’s 3% and lower than an expected 3.1%. However, the report shows a strong U.S. economy buttressed by consumer spending, a strong labor market, and solid business investment, even amid high borrowing costs. Consumer spending rose by 3.7% in the third quarter. Nonresidential fixed investment, a way to look at companies’ outlays on business equipment and investments, rose at a 3.3% rate in the third quarter. Although the rate of growth was slightly smaller than expected, it is still above the average rate of growth from 2009 to 2019, when the GDP rose at an average rate of 2.5%.

Mortgage rates holding around 7%: Fixed mortgage rates leveled off at 7% after reaching their highest level in three months, according to Mortgage News Daily. The average 30-year fixed mortgage rate reached 7.05% as of November 4 after a peak of 7.09%. Higher rates hit mortgage applications, which fell for the fifth consecutive period. Based on the Mortgage Bankers Association’s weekly survey results for the week ending October 25th, the purchased application index dropped 0.1% on a seasonally adjusted basis when compared to the previous week. The Refinance Index fell by 6% from last week while, in some good news, there was a 5% increase in mortgage applications to purchase a new home.

Consumer confidence surges to highest level in nine months: The Conference Board Consumer Confidence Index ticked up in October to 108.7 from 99.2 in September, as consumers upgraded their current conditions and felt more positive about their short-term outlook. The share of consumers anticipating a recession in the next 12 months fell to its lowest level since July 2022: the Expectation Index improved by 6.3 points to 89.1, well above the threshold of 80 that signals consumer expectations of a recession. Americans’ assessment of the current labor market situation improved as well, with 35.1% of consumers saying jobs were “plentiful,” up from 31.3% in September. Two out of ten (21.0%) of them expected business conditions to improve, up slightly from 19.4% in September. Even with interest rates elevated, the number of those who planned to purchase a home increased in October.

A cooling housing market leads to small home equity dip in Q3 of 2024 while underwater home mortgages stay low: ATTOM’s third quarter 2024 U.S. Home Equity & Underwater Report showed that 48.3% of mortgaged residential properties in the U.S. were equity-rich, down from its peak of 49.2% in Q2 of 2024, but still up from 47.4% a year earlier. ATTOM defines “equity rich” as a residential property’s estimated loan balance being no more than half of their estimated market values. Equity has elevated as residential property values continued to rise. Among the 50 highest equity-rich ZIP codes, a whopping 31 were in California. Only 2.5% of mortgaged homes were defined as underwater, up slightly from 2.4% in Q2 but remained the same as Q3 of 2023. ATTOM defines “underwater” as the combined estimated balances of loans secured by properties that are at least 25 percent more than those properties’ estimated market values.

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With mortgage rates climbing to a 3-month high, housing demand in the past few weeks has gone down as the number of mortgage applications reached its recent low since July. Home sales, as such, will likely remain soft in October and November until rates start coming down again. Meanwhile, new home sales last month reached the highest level since May 2023 as new housing markets benefited from low rates in September. However, with rates back to 7% recently, sales momentum in the new housing market will likely slow in the near future. On a brighter note, consumer short-term inflation expectations in September continued to stay at the lowest level since early 202, which at least offers hopes that rates could gradually come down in the coming months.

Inflation expectations steady for one year but increase in the long-term:  According to the latest findings from the September 2024 Survey of Consumer Expectations released by the Federal Reserve Bank of New York, median inflation expectations over the next 12 months remained unchanged at 3.0%, while the three- and five-year consumer expectations ticked up. At the three-year horizon, inflation expectations rose from 2.5% to 2.7%, and at the five-year horizon, expectations increased from 2.8% to 2.9%. The most significant increases in inflation expectations were seen among respondents with a high school education or less, which suggests that those with lower levels of education were anticipating higher overall price growth. Their more pronounced concerns about rising inflation, particularly at the three- and five-year horizons, reflected heightened uncertainty or expectations about future economic conditions, such as feelings of vulnerability toward price increases, housing affordability, and wage growth.

New home sales increase in September: September data released last week by the US Census Bureau indicated that new single-family homes sales reached 738,000 (seasonally adjusted), marking a 4.1% increase from August 2024 – the highest rate since May 2023. On a year over year basis, new home sales rose 6.3% from 694,000 units recorded in September 2023. The surge in new home sales was likely attributed to the ease in mortgage rates we saw in September, which hit their lowest point in over a year and a half by the end of the month. On the supply side, new for-sale housing units inched up last month to 473,000 (non-seasonally adjusted) from 472,000 in August, but the months of inventory dipped slightly to 7.6 months from 7.9 months, as sales increased at a faster pace. The overall inventory level stayed elevated and remained sharply higher than the 4.2 months of supply registered for single-family homes in the resale market. The increase in new home sales in September is encouraging, but the sustainability of its upward momentum will be tested in coming months, as the recent uptick in mortgage rates will likely present challenges in the housing market.

Mortgage rates continue to rise as mortgage applications drop: Mortgage rates have climbed to the highest level in three months, according to Mortgage News Daily. The average 30-year fixed mortgage rate reached 7% as of October 28, a level not seen since early July. As a result of the rising rates, mortgage applications have been declining, hitting their lowest level in three months as both purchase and refinancing applications tipped. According to The Mortgage Bankers Association’s weekly survey, for the week ending October 18th, the purchased application index dropped 6.7% on a seasonally adjusted basis when compared to the previous week, but the unadjusted purchase index was up 3% from the same week one year ago. The Refinance Index decreased 8% compared to the previous week and was 90% higher than the same week a year ago.

Jobless claims unexpectedly fall: Jobless claims decreased by 15k, falling to 227k from 242k recorded in the week prior, according to the latest data released by the Department of Labor. Despite the drop in new applications for unemployment aid last week, continuing claims hit 1.897 million in the week ending October 12th, reaching the highest level for insured unemployment since November 2021 when 1.974 million continuing claims were recorded. The elevated level of claims could be an indication that the labor market is getting tighter, and it has become harder for those currently collecting unemployment benefits to land a new job. More lights will be shed on the labor market next week, as the official October jobs report is scheduled to be released on November 1st and should provide some additional clues to the health of the jobs market.

U.S. single-family home rent prices see steady increase: U.S. single-family home rent prices went up 2.4% year over year in August, the lowest rate since last fall, according to the latest CoreLogic Single-Family Rent Index. Prices for detached rentals grew 2.3% year over year, while attached properties increased modestly by 2%. High-end rental prices grew faster, with an increase of 2.9% year over year, whereas low-end prices experienced a slight decline of 0.2%. Of the metropolitan areas surveyed, coastal metros such as Seattle and New York had the greatest increases. Despite the boom in prices in coastal metros, Los Angeles and San Diego rent prices stayed under a 2.0% year over year increase. While overall U.S. annual single-family rent growth remained below 3%, prices were still up nearly 33% compared to the beginning of the pandemic.

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California home sales dropped to the lowest level in nine months but will likely improve, albeit slowly, as the market enters the final quarter of 2024. In the latest sale & price report, the number of opened escrows once again exceeded last year’s levels for the third consecutive month and point to an increase in home sales in October. The median home price in California continued growing for fifteen consecutive months, but at a more moderate pace, and is expected to continue moderating for the rest of year. With prices expected to soften and rates likely to normalize by the end of the year, the fourth quarter is a window of opportunity for homebuyers on the sideline to re-enter the market. In the broader U.S. market, housing starts dipped 0.5%, with single-family construction holding steady while multifamily development slowed. The economy remains solid with retail sales showing strong growth, despite concerns about consumers’ financial wellbeing and a slowing job market.

California home sales take another step back despite falling mortgage rates: Closed escrow sales in September for existing single-family homes in California dipped 3.4% month-over-month and reached an annualized rate of 253,010. This was the lowest sales level in nine months despite mortgage rates falling below 6.5% for the first time in over a year in August when most sales opened escrow. On a year-over-year basis, sales rose by 5.1% and nudged the year-to-date sales figure up 0.9% through the first nine months of the year. Meanwhile, statewide pending sales surpassed last year’s level for the third consecutive month, suggesting an increase in closed sales in the month ahead. The rebound in mortgage rates since early October, however, could slow sales’ growth pace and may result in softer-than-expected housing demand in the fourth quarter.

Slower price growth creates opportunity for homebuyers in Q424:  The statewide median home price in September continued to grow year-over-year for fifteen consecutive months, with an increase of 2.9%, which was the smallest gain since July 2023. On a month-to-month basis, prices dropped 2.3%, a dip larger than the historical seasonal decline observed in more than five decades. A smaller share of higher-priced homes in the mix of sales could be a contributing factor on the slower growth in the overall statewide median price. Housing inventory, on the other hand, has been improving steadily in recent months as the market enters the off-peak homebuying season which also might have applied downward pressure on home prices. With home prices expected to ease further in the coming months, the fourth quarter may present a good buying opportunity for those who have been on the sideline, especially since interest rates are expected to gradually move back toward their historical norms before the end of the year.

Mortgage rates surge to highest levels in three months: Mortgage rates have risen sharply since early October as hopes for a big rate cut by the Fed continues to fade after the release of a strong job report. The average 30-year fixed rate mortgage (FRM) on October 21, in fact, surged to the highest level since July, according to Mortgage News Daily. Rates have gone up from near 6% in mid-September to almost 7% for top-tier 30-year fixed loans. Today’s sharp increase came without a clear explanation, as no significant economic report or event was released or took place that triggered the jump. While several theories have been proposed, including shifting election odds, options market dynamics, and concerns over U.S. deficits, none seem sufficient to explain the rapid rise. This marks one of the largest rate increases in recent months, particularly on a day without a major economic catalyst. Rate fluctuations could continue until after early November, as the upcoming jobs report, the presidential election, and the Federal Reserve’s rate announcement are all key events that could create volatility in the market.

US housing starts ease on decline in multifamily construction:  In September, overall housing starts dipped 0.5%, reflecting a pullback from August’s significant rise. Single-family construction, however, remained resilient with its second consecutive increase, primarily due to its three-month uptrend in permits. Lower mortgage rates, driven by the Federal Reserve’s easing cycle that began in September, are expected to further boost single-family development despite ongoing financing challenges. In contrast, multifamily construction continues to struggle, with declines in both starts and permits as higher vacancies and reduced credit access weigh on new projects. Although some regions, like the South, show stronger activity in multifamily permits due to population growth, the broader trend for multifamily development remains weak. Builders remain optimistic about single-family housing, with the NAHB Housing Market Index rising in October, signaling improved expectations for the future.

Retail sales post solid gain, showcasing a resilient economy: U.S. retail sales exceeded expectations in September with a 0.4% overall increase, and posted a stronger-than-anticipated 0.7% increase after excluding sales at auto dealers and gas stations. Control group sales, which align with consumer spending in GDP calculations, also rose 0.7%, marking the largest increase in three months. Despite concerns about consumer financial health and potential labor market weakening, consumer spending remained resilient, as 10 of the 13 major retail categories saw increases. However, auto sales remained flat, and gas station sales declined, largely due to price fluctuations. Overall, consumer spending continues to support economic growth and will likely be reflected in the GDP number for Q3 to be released next week.

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