February 23, 2026 – The economy lost some momentum at the end of 2025, with growth slowed meaningfully in the fourth quarter as government shutdown weighed on spending. A modest increase in the last three months of the year was always expected but the decline was sharper than what economists anticipated. Meanwhile, California’s housing market began the year on a subdued note, with sales and prices retreating as buyers grappled with mortgage rate volatility. With tariff uncertainty likely to linger on in the near term, policy disruptions and affordability challenges will remain headwinds in the months ahead. Yet beneath the softer headlines, there are signs of resilience and stabilization. Consumer spending remains positive, investment in artificial intelligence (AI) continues to expand, and pending home sales suggest near term improvement. As the housing supply-demand conditions slowly rebalance, our outlook for 2026 remains cautious but optimistic.  

Economic growth slows in Q4 due partly to government shutdown: The U.S. economy continued to grow but at a sharply slower pace in the last quarter of 2025, according to Commerce Department. Gross domestic product (GDP) increased at an annualized pace of 1.4% in the fourth quarter of last year, well below the 4.4% recorded in the previous quarter and the 3.8% registered in the second quarter of 2025. The six-week government shutdown that took place in early part of the quarter weighed down overall spending, and the Department estimated that it might have shaved off economic growth by one percentage point. Consumer spending, which makes up about two-thirds of the overall spending, increased by 2.4%, which was decent but was also the slowest pace in the past three quarters. Business investment, which includes AI spending, was the bright spot in the latest report with an increase of 3.8% annualized growth rate compared to the prior quarter. The housing market continued to weigh on growth, however, with a drop of 1.5% in residential investment in the fourth quarter. For the year as a whole, the U.S. economy grew at 2.2% in 2025 and recorded the weakest rate since 2020. Despite a pullback at the end of 2025, the U.S. economy will likely bounce back in the first quarter of 2026 if the labor market stabilizes and AI investment continues to pour in.   

Supreme Court tariff ruling opens new era of uncertainty: The U.S. Supreme Court ruled that President Trump lacked the authority to impose tariffs under the International Emergency Economic Powers Act (IEEPA), and the taxing power should be reserved to Congress. The decision invalidated most of President Trump’s tariffs but left unanswered the question of whether businesses are owed refunds for previously paid tariffs. President Trump responded to the ruling by announcing a new round of tariff under Section 122 of the 1974 Trade Act, which permits tariffs of up to 15% for as long as 150 days to address balance‑of‑payments concerns. The administration also signaled that it would consider other tariff options as alternatives. The ruling, while clearing up the president’s tariff usage limitation, raised a new round of uncertainty for businesses, trading partners, and the economy.   

Home sales kick off the year with a soft note: California home sales retreated in January, declining from both the prior month and the same month last year to their lowest level since May 2025. Sales of existing single-family homes fell 10.8% from December’s downwardly revised pace of 287,570 units, as mortgage rate volatility weighed on buyers’ decisions to close escrow at the start of the year. The decline extended the streak of sub-300,000 seasonally adjusted annualized sales to 40 consecutive months, underscoring the ongoing market weakness in the last few years. However, stronger-than-typical month-to-month increase in pending sales suggests that closed sales could rebound in February, especially since mortgage rates have recently declined back to their near recent lows.

California home prices reach the lowest level since Feb 2024: The statewide median home price declined last month from both the prior month and the same month last year, falling to a 23-month low of $823,180 as market competition remained cool at the start of the year. Existing single-family home sales’ median price dropped 3.2% from December, was down year-over-year for the third time in the past four months and registered its largest annual decline since June 2023. Moderating demand and still-elevated inventory levels continued to exert downward pressure on prices at the start of the year, a trend that suggests the market is slowly transitioning towards a more balanced supply and demand condition. 

Homebuilder confidence slips again as expectations for future sales adjusted downward: U.S. homebuilder sentiment dipped again last month as elevated costs continued to temper builders’ optimism, according to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The February HMI fell one point from the prior month to 36, as housing affordability challenges and construction cost concerns continued to slow building activity. Builders’ sales expectations in the next six months dropped three points to 46, while traffic of prospective buyers slid again by two points to 22. The latest HMI survey also revealed that 36% of builders cut prices in February, an improvement from January and was the lowest level since May 2025. The use of sales incentives (65%), however, was unchanged in February, and it was the 11^th straight month that the share exceeded 60%. With tariff uncertainty heating up again, challenges on the supply-side will remain and will likely have an impact on developers’ confidence in the near term.

Note: This summary report gets updated every Monday by 6:00 pm PST. Feel free to email us at [email protected] if you have any questions and/or feedback.

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