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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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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The housing market continues to adjust to the first rate cut by the Federal Reserve in years, sliding mortgage rates, and an economy that keeps surprising to the upside. Putting all of these factors together, C.A.R. (the California Association of Realtors) released its forecast for 2025 and expects both home sales and home prices to continue their upward trend. Consumer confidence has slid, reflecting the normalizing labor market and more muted economic growth, but income and spending continue to rise. New home sales have yet to rebound despite the recent rate cut, but demand is already picking up and preliminary indications suggest an unseasonably strong winter in California.

2025 California housing forecast released: C.A.R. released its 2025 Economic & Housing Market Forecast at its annual conference last week. Home sales are expected to rise by more than 10% next year as dwindling interest rates help to bolster demand and unlock critical housing supply to generate a second consecutive uptick in transactions. Home prices are expected to continue their upward trend as well since the increase in supply will still leave inventory very tight by historical standards. Even though inventory will be up from the past two years, it will only help to normalize price growth from the double-digit range, where it was earlier this year, into the mid-single-digits in 2025. Fortunately, the economy is currently forecast to narrowly avoid a recession, which should be a net positive for housing next year as well.

Lower rates yet to boost new home sales: Although rates have dipped more than 100 basis points over the past 3 months, new home sales retreated again in August—shrinking by 4.7%. This matches the results seen in the existing resale market that were reported earlier this month and suggests that the positive benefits of lower rates is still cutting against the typical seasonal slowdown that happened each fall as families return to school and begin to focus on the holiday season. However, with the Fed’s recent rate cut and mortgage rates stabilizing in the low-6% range, demand for new and resale homes is expected to improve as we approach the end of the year. California data shows that we could be in for an unseasonably strong winter as pending sales are typically dropping off much more precipitously by this time of year. That they are stable indicates that year-to-year growth rates for closed sales could accelerate during the final quarter of 2024.

Labor market weighs on consumer confidence in September: Consumers remain pessimistic despite improvements in other economic areas. The overall consumer confidence index slipped nearly 7 points in September marking the largest one-month drop in 3 years. Top concerns for consumers last month were job security and wage growth, which reflects doubts about sustaining the economic recovery. This cautious outlook contrasts with more optimistic views on other economic fronts like inflation and consumer spending. While overall job growth has continued in recent months, consumers are less optimistic about both the quantity and quality of available jobs, and portends ill for wage growth. Job seekers are still facing challenges, especially those with lower qualifications. The negative outlook on the job market is expected to begin to impact consumer spending habits, with individuals being more cautious in their financial decisions.

Mortgage market reminds consumers not to wait for the Fed: Despite the Fed embarking on a campaign of much- anticipated rate cuts for the first time in years, consumers are learning that waiting on the Federal Reserve to deliver cheaper mortgage rates may not be the recipe for success. This is because financial markets in general, and the bond market in particular, move in anticipation of Fed behavior. When the Fed acts according to expectations from the market, the market reaction is minimal because these expectations have already been priced into the market. Indeed, even before the Fed had announced their first rate cut of 50 basis points, the Treasury market and mortgage rates had already begun to fall from the mid-7s to the low-6s. Indeed, when the Fed finally announced their rate cut, mortgage rates actually increased slightly to roughly 6.2%, where they still stand at the time of this writing.

Bond market becoming increasingly bullish on soft landing for the economy: After being in negative territory for more than two years straight, the “yield curve” is no longer inverted. This metric, which measures the spread between short- and long-term bonds, is typically viewed as a good measure of short run economic risk as an “inversion” indicates that short-term investors are worried about the immediate future of the economy and therefore have a smaller appetite for short-term treasuries. This pushes down the price of short-term bonds thereby increasing short-term rates and tipping the yield curve negative. As short-run fears about the economy have subsided, demand for 2-year bonds has increased—driving up prices, lowering rates, and pushing the yield curve back into balance. There are still some concerns about a potential for recession or other economic shocks to the commercial real estate or stock markets, but financial markets appear to have greater confidence that the economy will avoid a recession in 2025.

The fed funds rate was lowered last week by half a percentage point for the first time since 2020. With the rate cut fully anticipated by the market before the announcement, mortgage rates did not show any immediate downward movement after the latest FOMC meeting. The central bank’s latest move and its plan on future rate reductions, however, will benefit homebuyers and home sellers in the coming months. With mortgage rates remaining near the lowest level in two years and home prices softening through the end of the year, housing activity could pick up in the fall as consumers seize the opportunity of lower costs of borrowing and reenter the market.

Fed slashes interest rates for the first time in four years: The Federal Reserve cut rate by 50 basis points (bps) as the central bank finally felt confident enough about the sustainability of the inflation easing trend. It was the first rate cut in four years, and two more rate cuts will likely take place before the end of the year, as suggested by the Fed’s latest year-end projection. All 19 Fed officials voted unanimously for a rate cut in the latest FOMC meeting, with 18 of them agreeing on a 50-bps rate cut, while one fed governor opted for a 25-bps rate reduction. With the Fed switching its focus to the labor market, more rate cuts are expected in the next 15 months, with another 100-bps decline projected for 2025. While interest rates ticked up slightly after the announcement and the following day, the declining trend will likely resume before the end of the year if inflation eases further, and job growth continues to slow.

Sales pull back as buyers adopt “wait and see” strategy: Housing demand took a step back in August with closed sales reaching the lowest level in seven months, despite the average 30-year fixed-rate mortgage dipping to a 4-month-low in July when many closed sales opened escrow. After bouncing back to a 5-month high in July, sales of existing single-family homes in California slipped 6.3% month-over-month but increased modestly by 2.8% from August of last year. Pending sales, meanwhile, exceeded last year’s level for the second consecutive month and had the largest year-over-year growth rate since May 2021. With the monthly total up 7.7% annually and the average pending sales per business day up 13.2% from the year-ago level, closed sales should see a solid year-over-year increase for the month of September.

Home price growth in California continued to moderate: The statewide median price continued to grow from last year but recorded a much more modest year-over-year gain in August. The 3.4% growth marked the 14^th consecutive month of annual price increase for the Golden State, though it was the smallest since September of last year. On a month-to-month basis, the median inched up 0.2% – the smallest July-to-August price increase since 2008 – and was below the long-run average of 1.2%. Sales in higher-priced market segments continued to have an effect on the mix of sales but their impact on the state-wide median price growth has tapered off in recent months. Home prices could soften further in coming months as the market transitions into the off-season but should continue to register year-over-year growth for the rest of the year.

Retail sales surpass expectations but show broad-based weakness: U.S. retail sales in August exceeded economists’ estimates for the second straight month as overall spending on retail and food services inched up 0.1% from the prior month and increased 2.1% from the same month of last year. While it was relatively soft compared to the revised 1.1% monthly gain recorded in July, the latest reading beat the -0.2% growth rate expected by the consensus. Despite the slight improvement in the headline number, a closer look at the August report suggests broad-based weakness across store types. Department stores (-1.1%), electronics and appliance stores (-1.1%), furniture & home furnishing stores (-0.7%), clothing and clothing accessories (-0.7%), and grocery stores (-0.6%) all posted monthly declines in August. On the other hand, non-store retailers (+1.4%) – which include online spending, and miscellaneous store retailers (+1.7%) were two exceptions that rose strongly last month. With several main categories reported declines in the latest report, there are signs that suggest consumers may have already tapped out. More slowdown in the economy will likely be observed in the coming months but recent data does not indicate a dramatic pullback in spending that could result in a recession in the near term.

Home building perks up as outlook brightens: U.S. residential construction bounced back strongly in August after a sharp decline in July, with housing starts surging 9.6% from a month ago, according to the latest release from the Census Bureau. At a seasonally adjusted annualized rate of 1.36 million units, housing starts were up 3.9% from last August’s 1.3 million units. Last month’s increase in residential construction was due partly to lower mortgage rates that brightened builder outlook but also reflected the fading drag from Hurricane Beryl that had depressed homebuilding in the South. The rebound in single-family construction activity was particularly strong, as single-family starts surged 15.8% month-over-month after dropping five months in row. Whether construction activity can keep up its momentum in the next few months, however, is questionable. While lower interest rates will increase housing demand in the near term, more existing housing supply will also be released as rates go down, which could undercut the demand for new homes.

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