As the market awaits for the Fed’s announcement on their upcoming rate cut later this week, latest inflation reports continue to provide mixed signals on how much the fed funds rate will be reduced in the September meeting. The market currently projects a 63% chance of a 50-basis-points (bps) rate reduction, and a 37% chance of a 25-bps rate cut. Regardless of the size of the reduction, if mortgage rates remain near the current level or dip further in the coming months, the housing market should begin to see a more consistent bounce-back as we move toward the end of the year.

Inflation drops to the lowest level since early 2021: A tepid increase in food prices and another moderation in energy prices kept inflation in check last month. The August headline Consumer Price Index (CPI) increased 0.2% from the prior month and was up 2.5% from the same month last year. The monthly increase was in line with consensus expectations, while the year-over-year gain was slightly below the estimate of 2.6%. The latest read on the annual figure was at its lowest level in 3 ½ year. Excluding energy and food prices, the core CPI rose 0.3% for the month and remained virtually unchanged at 3.2% for the year-over-year growth rate. Goods prices dropped more than expected, but the difference was largely cancelled out by the faster-than-anticipated price growth in services inflation. With consumer prices coming in mostly in line with economists’ forecasts, the reduction in the federal funds rate scheduled to be announced later this week is a 100% certainty. The market is currently projecting a 37% probability of a 25-bps rate cut in the upcoming meeting and a 63% probability of a 50-bps rate cut.

Expectations on price growth and jobs remain stable: Consumers expectations on inflation at the short-term and the longer-term horizons remained unchanged but up slightly at the medium-term in August, according to the latest New York Fed’s Survey of Consumer Expectations. At the one-year horizon, the median inflation expectation was at 3.0% last month, the same as what was recorded in July, but a solid improvement from the 3.6% recorded in August 2023. Consumers also expected home prices to increase 3.1% a year from now, a slight increase from the 3.0% recorded in July 2024. Their expectations on the labor market came in mixed, with the likelihood of losing one’s job in the next 12 months dipping one percentage point from the prior month to 13.3% in August. The mean perceived probability of finding a job if one’s current job was lost, on the other hand, fell 0.2 percentage points from July to 52.3% and was well below last August’s reading of 55.7%. With jobs data suggesting a gradual slowdown of the labor market in the short term, consumer optimism on jobs growth will likely moderate in the coming months, while their expectations on inflation will continue to improve.

Homeowner equity continues to grow solidly from a year ago: Homeowner equity increased with a solid pace on an annual basis in Q2 2024 as home prices remained on an upward trend in the past 12 months, according to the latest CoreLogic Homeowner Equity Insights. Homeowners with mortgages in the U.S. have seen an aggregated increase of $1.3 trillion in equity since Q2 2023, a surge of 8.0% year-over-year. Mortgaged residential properties with negative equity declined 4.2% from Q1 2024 and 15.0% from Q1 2023. Roughly 1.7%, or 960k, of all mortgaged properties were underwater, which was significantly below the peak of 26% observed in Q4 2009. On average, U.S. homeowners with mortgages gained $25,000 in equity last quarter compared to a year ago. California had the second-highest equity gain of all states in Q2 2024, with an average homeowner equity increase of $55,000 year-over-year in the latest quarter. The share of homes with negative equity in California remained unchanged at 0.7% in Q2 2024 and was one of the three states reported by CoreLogic with less than 1% negative equity share.

Economic and policy uncertainty curbs small business optimism: The NFIB Small Business Optimism Index fell for the first time in five months as dimming sales outlooks began to worry business owners more. After climbing for four consecutive months, the index dropped 2.5 points from 93.7 in July to 91.2 in August, erasing all the gain (and some) acquired in the prior month. Uncertainty around future public policy and the outlook of business conditions continued to weigh heavily on small firms. The Uncertainty Index, in fact, rose to 92, its highest level since October 2020. While inflation remained the top concern for small business owners, real sales volume expectations were the largest contributor to the decline in optimism, as the net percent of owners expecting higher real sales volumes fell nine points in August. With the political turmoil remaining in place in the near term in the U.S., expect more volatility in the index in the coming months.

Foreclosures down both monthly and annually in the U.S.: U.S. foreclosure activity moderated last month, as filings went down 5.3% from a month ago and declined 11% from last August, according to ATTOM’s latest U.S. Foreclosure Market Report. A total of 30,227 properties in the U.S. had a foreclosure filing status last month, which was significantly below the peaks observed during the 2008 housing market collapse when filings exceeded 300,000 per month. For the month of August, 20,747 properties in the U.S. started the foreclosure process, a drop of 5.1% from the prior month, and a decline of 9.4% from the same month in 2023. At the national level, one in every 4,662 properties had a foreclosure filing in August. With home price growth moderating but continuing on an upward trend, foreclosure activity is expected to remain steady. The softening of the jobs market, however, could put some upward pressure on foreclosure rates in the medium term if the economy ended up slowing down at a faster pace than expected.

The market has been relatively quiet in the lead-up to the Federal Reserve’s meeting on interest rates next week. Although recent economic data remains relatively strong, markets remain optimistic that the key policy rate will be cut by the Federal Open Market Committee. This has already begun to have a positive impact on the market as signs of homebuyer demand have perked up in recent weeks. However, prices continue to rise as well and that has helped to keep homebuyer sentiment restrained. The full benefit of lower rates will continue to play out in the coming months, but fortunately, the anticipated uptick in demand is also poised to be met with additional inventory, which is also slowly being unlocked as interest rates normalize.

Jobs data shows labor shortage shrinking: Two separate reports released last week show that the labor markets remain relatively healthy, but that the labor shortage that has driven much of the remaining inflation has eased. Headline job growth in the Commerce Department’s latest release came in at 142,000, which is slightly slower than during the first half of 2024, but remains in positive territory. At the same time, the report on job openings showed that there are fewer unfilled positions. In May of 2022, there were roughly 6.2 million more open positions than there was unemployed labor supply that was looking for a job. Last month, the shortage dipped to just 510,000 and was the first time the U.S. economy has been less than 1 million workers short since the economy reopened in earnest back in 2021. This should help inflation to keep trending toward the Fed’s 2% target as we approach the end of the year.

Interest rates continue their slide: As all eyes turn to the Federal Reserve’s Open Market Committee meeting next week, bond prices have risen in anticipation of a rate cut and mortgage rates have benefited from a strong treasury market in recent weeks. Last week, Freddie Mac’s average 30-year fixed-rate mortgage rate held steady at 6.35% and today’s daily quotes were down slightly more, averaging 6.27%. This represents a more than 100-basis point improvement in rates from a few months ago, though most of the benefit of the upcoming rate cut may already be priced into today’s mortgage rates. Notably, average rates for VA and FHA loans have already dipped below 6%, which should also help to generate additional housing inventory as the so-called lock-in effect diminishes somewhat.

Mortgage applications and pending sales: Although the level of mortgage applications and pending sales are still relatively low, compared with the decade-high levels reached back when rates were 3%, they are holding up much better to the seasonal slowdown than has been the case over the past two years. In fact, as rates came down in July and August, pending sales began to re-accelerate with preliminary analysis showing another double-digit gain in pending sales last month. In addition, September mortgage purchase applications are threatening to exceed the prior year figures for the first time since May 2021. Regionally, most parts of the state are within the margin of error, but the Central Valley slightly outperformed the Bay Area and the Far North in terms of housing demand last month, with Southern California and the Central Coast landing in the middle of the pack.

Construction activity continues to lose momentum: U.S. construction spending remain soft, with the total outlays dropping 0.3% in July. The decline was worse than consensus expectations, as economists had predicted a monthly decrease of 0.1%. Residential construction declined on a month-to-month basis for the first time in four months after revision on prior months’ data, with the latest drop attributed primarily to the weakness in single-family construction. In July, spending on new single-family dipped 1.9% from June, while new multifamily was essentially flat from the prior month. On a year-over-year basis though, new single-family remained sharply higher than a year ago by 7.7%. New multifamily dipped from 12 months ago by 6.7%. The pullback in overall construction spending was due again to elevated interest rates, despite the fact that rates started trending back down in early July. Lower interest rates should help revive builder sentiment in coming months, but housing permits from recent reports suggest that building activity will remain weak in the short term.

Homebuying sentiment stalls despite an increase in mortgage rate optimism: The Home Purchase Sentiment Index released by Fannie Mae inched up in August as consumers felt more positive about the mortgage rate environment. The share of consumers who believed that mortgage rates will go down over the next 12 months increased sharply by 10 percentage points from July’s 29% to August’s 39%. Meanwhile, those who expected home prices to decrease over the next 12 months increased moderately from 21% in July to 25% in August. Despite an improvement in the optimism in future direction of mortgage rates, the share who said that it is a good time to buy remained unchanged at 17% last month. With rates moderating to the lowest level since April 2023 and home prices expected to come down as the market transitions into the off season, homebuyers’ optimism will hopefully improve in coming months. Those who said that it is a good time to sell also remained flat at 65% in August. The stall in home selling confidence could be attributed partly to seasonal factors, but homebuyers staying on the sideline might also be a contributing factor.

Latest macroeconomic data released last week suggest that the economy remains solid, with the cooling trend in inflation continuing at the start of Q3 2024. Both consumers and business leaders feel upbeat in general and have a positive outlook about the near future. With the Fed expected to adjust rates downward in their next few meetings, the housing market should pick up some momentum throughout the rest of the year. There are challenges that could hinder the housing progress in the next couple years though. The ongoing insurance crisis, for example, is one such huddle that has presented difficulties for homebuying and could remain a major headache for the market in at least the next couple of years.

Consumers feel more positive with expectations of future improve: The Conference Board Consumer Confidence Index climbed again in August to 103.3 from an upwardly revised 101.9 in July, as consumers felt slightly more upbeat about the future. The Present Situation Index bounced back from 133.1 in July to 134.4 in August, while the Expectation Index improved from 81.1 in the prior month to 82.5 in the current month. Consumers’ perception of the economy was likely affected by the July jobs report and the stock market’s volatility exhibited in early August, as they were more pessimistic about the labor market outlook and slightly less positive about their future income. Their views about a possible recession, however, remained unchanged and were well below the 2023 peak. Nearly one-third (31.5%) of consumers expected lower rates over the next 12 months, the highest since April 2020. Despite interest rates dropping to the lowest level since May 2023, those who planned to purchase a home fell to a new 12-year low. The share will likely bounce back in coming months, however, if rates continue their downward trend in the next few weeks.

Business leaders remain cautiously optimistic for the future: CEO’s optimism declined from 54 in Q224 to 52 in Q324 as business leaders downgraded current conditions in the latest quarter, according to the Conference Board Measure of CEO Confidence. The index remained above 50 for the third consecutive quarter, nevertheless, an indication that there were more positive responses than negative responses. CEOs were less upbeat likely due to the delay in rate cuts and the recent slowdown in consumer spending. A quarter (26%) of CEOs said that general economic conditions were worse than they were six months ago, an increase from 16% reported in Q224. However, the share of CEOs expecting a recession dipped to 30%, a decline from 35% in Q224 and a sharp drop from 84% in Q323. In fact, nearly one-third (32%) in Q324 expected the economy to improve over the next six months, up from 30% in the prior quarter. When asked about risks impacting their industries, CEOs ranked “Cyber” (59%) at the top of the list, followed by “Geopolitical instability (52%), and “legal and regulatory uncertainty” (46%).

Allstate receives approval to increase homeowner insurance rates by 34%: The California Department of Insurance approved Allstate to raise homeowner insurance rates by an average of 34.1% across the state. The increase is the largest in California for any major insurance company in the past three years. The rate increase will affect more than 350,000 policy holders and Allstate customers will see their premium increase on their bills at their first renewal date on or after November 7^th. The rate changes vary between a decrease of as much as 57% to an increase of nearly 650%. Allstate is hardly the only insurer with a major rate hike this year. In March, Liberty Mutual/Safeco was also approved to increase rates by an average of 10.5%, while State Farm got an average increase of 20% that went into effect the same month. State Farm has since requested another 30% rate hike that is pending for approval. With insurance premiums expected to increase sharply this year and possibly next year, housing affordability just got a bit more challenging for homebuyers.

Insurance crisis creates challenges for homebuyers: Survey results from C.A.R.’s 2024 Housing Market Survey, indeed, confirm that the current insurance situation in California is making it more challenging for homebuyers. Data collected in early August suggests that 31% of the buyers in the state had difficulties obtaining homeowners insurance when purchasing their house, a jump from 17% recorded in 2023. Of those who encountered difficulties obtaining insurance, 45% of them had issues with premiums being too expensive, while 30% of them were simply denied by their insurers. As a result, over two out of ten buyers ended up getting insurance coverage from the California FAIR Plan, the state-created but privately run insurer that is meant to be the “insurer of last resort.” Their plan, however, could see a ‘substantial’ rate hike as well in the near future.

Fed’s preferred inflation gauge in line with expectation: The personal consumption expenditure price index (PCE) – the Fed’s favorite inflation indicator – increased 0.2% on a month-over-month basis in July and was up 2.5% from a year ago, according to the Department of Commerce. Excluding food and energy, the core PCE recorded a 2.6% year-over-year increase, which was better than the consensus expectations of 2.7%. Goods prices remained virtually unchanged from the prior month, while services edged up 0.2% month-over-month. The latest PCE reading provides more proof to Fed officials that inflation continues to cool and the market priced in a 100%-chance as of August 30^th that a rate cut will occur in the next FOMC meeting in September. The only uncertainty is whether the U.S. central bank will reduce its policy rate by 25 basis points (bps) or 50 bps. Despite the encouraging news, interest rates actually ticked up slightly, with the average 30-year fixed rate mortgage climbing 0.2% on Friday. Bond traders had already anticipated the modest price increase and might not have considered the latest inflation reading consequential in the bigger picture. A three-day weekend before the end of the month, which means low volume and light liquidity, might have played a role as well.

As an experienced agent with in-depth market knowledge and a reputation as a tough negotiator, I have a proven track record of helping my buyers secure contracts on their homes within the first three offers, all while ensuring a great price. With the recent NAR settlement changes, the world of real estate is shifting, and now more than ever, having a trusted real estate resource is crucial. I’m here to guide you home. Access my buyer guide through the link below for an overview of the buying process—a must-read for first-time homebuyers or those navigating these new market conditions. Let’s connect and turn your homeownership dreams into reality!

Buyer Guide

California home sales bounced back solidly in July, as prices moderated, and housing supply continued to grow from last year. While the rebound is not a V-shaped recovery, the turn-around is encouraging nevertheless, and offers hope that the boost in sales could kickstart the second half of the year. With the Fed signaling a policy rate cut in September and additional cuts to follow in the near term, mortgage rates will moderate further – albeit slowly- in the next couple quarters. Assuming that the economy will continue to slow but at a gradual pace, the housing market is expected to see more improvement in the next few months.

Housing market kicks off second half of 2024 with a positive note: The housing market bounced back in July as mortgage rates moderated in June and continued the declining trend in July. Home sales in California increased 3.6% from the prior month and were up 4.1% from the same month of last year. The statewide sales figure climbed to the highest level since February and could rise further if rates continue their downward trend. The median price at the state level dipped below $900,000 for the first time in four months, but still recorded a year-over-year growth of 6.5%. Home prices will soften further in coming months as the market transitions into the off season. New active listings increased from a year ago for the seventh consecutive month, with at least 41 counties in California adding more for-sale properties than last year. With rates likely to soften further in coming months, housing supply should continue to see year-over-year growth in the third and fourth quarters.

New home sales reach the highest level in more than a year: Sales of newly constructed single-family homes in the U.S. increased by double-digits in July and rose to the highest level since May 2023, according to the latest data from the U.S. Census Bureau and the Department of Housing and Urban Development. The sales pace of 739,000 units recorded last month exceeded consensus expectation of 625,000 units, and the jump of 10.6% from June’s revised 668,000 units was the sharpest monthly gain since August 2022. New home sales also edged up 5.6% from the same month of last year and increased 2.6% on a year-to-date basis compared to the first seven months of 2023. On the supply side, the number of for-sale properties dipped to the lowest level in six months, with new home inventory declining to 462,000 units in July. The number of new homes available for sale dropped 1.1% from the prior month but continued to grow from the same month of last year by 8.2%. With mortgage rates declining to the lowest levels since May 2023 and the Fed signaling interest rate cut in the upcoming September meeting, home sales could continue to bounce back in both the new and resale markets in coming months.

Housing affordability dips to lowest level since 2007: Housing affordability in California dipped in the second quarter, with the statewide index for existing single-family homes dropping 3 points quarter-to-quarter to 14% in the second quarter and declining from 12 months ago by 2 percentage points. High prices and elevated mortgage rates continued to keep borrowing costs elevated and pushed California’s affordability down to the lowest level in almost 17 years. The monthly mortgage payment for a median-priced home set an all-time high in the second quarter, surging 13.6% from both the prior quarter and from the same quarter a year ago as mortgage rates remained well above the year-ago level. Rates have moderated since July, however, and could soften further if inflation continues to ease in the next few months.

Declining trend in single-family housing starts continues: Residential construction dropped sharply in July, with housing starts falling 6.8% from a month ago in the U.S., according to the latest data released by the U.S. Census Bureau. At a seasonally adjusted annualized rate of 1.24 million units, housing starts were down 16% from last July’s 1.47 million units. Last month’s decline in residential construction was due primarily to a slide in single-family starts, which pulled back 14.1% from the prior month and fell 14.8% from the same month of last year. Multifamily starts, on the other hand, registered a back-to-back monthly increase in July, but remained down more than 20% from 12 months ago. The expectation of relatively weak home sales was the primary factor for the decline in housing starts in the past couple of months. Builder confidence, in fact, dipped in August for the fourth consecutive month as developers’ concerns about future demand continued to grow, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Builders ramped up incentives in August with 33% of them cutting prices, the highest share so far this year. The sentiment should improve in coming months, however, as the Fed is expected to cut rates multiple times in Q3 and Q4, which should help lower interest rates and spur housing demand.

Consumers are still spending as July retail sales show strength: Despite a slowing job market, U.S. retail sales unexpectedly surged in July after a slight dip in the prior month. Sales of retail and food services increased 1.0% from the prior month to $709.7 billion after declining 0.2% (revised) in June, beating economists’ expectations of a 3.0% growth. Retail sales also increased 2.7% year-over-year last month and the solid gain calmed down fears of a U.S. recession at least temporarily. A jump in sales of autos and motor parts, along with a robust gain in electronics, provided a boost in overall sales in July. A bounce back in building materials and home furnishing also contributed to the increase in retail spending last month. Retail businesses that are tied to the housing sector had been struggling in Q2 but could see some improvement in coming months as rates begin to slow more consistently. The biggest question mark, however, is still the future of the job market. If the unemployment rate continues to climb, consumers will tighten their wallets a bit more for the rest of the year.

California labor markets signaled full steam ahead in the latest jobs report released Friday with hiring posting its best showing in 6 months. However, the underlying details suggest that things may not be as rosy as the headline numbers suggest, which may help to provide cover for the Fed to lower rates later this year. With inflation slowing further in July, mortgage rates continue to rally, and homebuyer demand is finally approaching positive territory for the first time since rates began to rise in 2022. Mortgage delinquency rates remain very low in California and the percentage of homeowners with significant equity to stave off foreclosure in a worst-case scenario remains remarkably high. Fundamentals are also bolstered by the fact homeowners currently have very attractive mortgage payments, with roughly two-thirds of the state in a 4% rate or lower (90% of which are fixed-rate loans).

Inflation is still creeping toward the Fed’s target last month: For the second month in a row, headline inflation was below 3% on a year-to-year basis with July dipping slightly from June. This has helped to bolster hopes that the Federal Reserve will lower interest rates at their meeting in September. More importantly, core inflation, which excludes certain volatile items, continued its downward trend last month as well. However, service sector prices, wages, and housing costs remain stubbornly high, which prevented more robust progress in the Fed’s war against inflation. While headline inflation is likely to approach 2.5% this year, we expect the declines to remain incremental.

Mortgage rates essentially unchanged below 6.5%: The latest Freddie Mac interest rate for a 30-year fixed-rate mortgage remained below 6.5% for the second week in a row, though this figure was released prior to the latest inflation reading last week. Rates have now been below 7% for the past 11 weeks, consecutively, and the bond market is not indicating any near-term reversal of course as 10-year Treasuries remain below 4% currently. In addition, the yield curve is less inverted now than it has been since the Fed began raising rates, which suggests that the bon market is becoming more optimistic about both a rate cut in September as well as a soft landing for the economy.

Buyer demand on the upswing despite seasonal slowing: California typically sees home sales peak in the summer as homebuyers who entered escrow during the so-called “homebuying season” close their transactions prior to school resuming in the fall. This year has followed that typical seasonal pattern, meaning that home sales are beginning to return to lower levels before picking up again next spring. However, when controlling for typical seasonality, homebuyer demand is showing some signs of life. Mortgage applications last week, though still dipping, had their smallest decline this year and their second smallest decline since rates began rising in 2022. In addition, pending sales in July responded sharply to the recent reprieve in rates and should translate into a solid homes sales report in August.

Looks can be deceiving in the latest jobs report for California: California’s labor market had another strong month in July. With 21,000 net new jobs added, last month saw the biggest increase in nonfarm employment since January. However, below the surface, details suggest that the labor market may not be as strong as the headlines would suggest. First, nonfarm jobs are based on a survey of employers and can reflect multiple new jobs even if, theoretically, all of those jobs were filled by a single worker. Recent studies suggest that some workers are picking up multiple jobs, which could inflate overall job growth. Second, and relatedly, the survey of households shows starkly different results. While nonfarm jobs have been rising for 11 of the past 12 months, the number of workers that are employed has fallen by roughly 100,000 over the past 18 months and the number of unemployed workers has gone up by even more: from 858,000 in January last year to over 1 million last month. Even the composition of the 21,000 we did create looks much different than it did 18 months ago with our top 5 largest metros (which account for nearly two-thirds of California’s jobs) growing by an average 1.5% compared with an average of 2.8% in our 10 smallest metros (which only account for 4% of our labor market). This suggests that economic activity could be revised downward later this year, which may help to support additional/larger rate cuts by the Federal Reserve later this year.

Chance for unseasonably strong winter housing market: In addition to the positive response to the housing market as rates have dipped below 6.5%, several other factors could help to heat up California’s housing market during the holiday season. The recent jobs data suggests that a weaker economy may help the Fed to deliver lower rates this winter. The presidential election could also have an effect. Results on the impact of national elections on the market tend to fail most statistical tests, but there is anecdotal evidence that elections could cause the fall housing market to be slightly weaker and then making those sales up in winter as buyers who delayed their purchase until after the election jump back into the market. If inflation continues to improve, the labor market weakness begins to show up in other indicators, and the post-election bounce holds true, California could enjoy an unseasonably strong winter this year.