January 06, 2025 – 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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