September 23, 2024 – 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.

Note: The weekly market minute report is updated every Monday by 6:00 PM PST.