February 24, 2025 – Mortgage rates continue to dictate the direction of the housing market and California had a soft start for 2025 as rates remained elevated. Despite a sluggish beginning in sales in January, housing supply increased more than expected last month, which could lead to slower price growth, more options for buyers to choose from, and allow some demand to be fulfilled as competition heats up in the upcoming homebuying season. There is no doubt though that the market will see challenges in the months ahead, as uncertainties in the policy arena continue to linger on and are affecting the sentiments of both consumers and builders.

January home sales dragged down by elevated rates: California home sales pulled back to start the year as mortgages rates climbed in the first two weeks of 2025 and reached their 8-month high in mid-January. The number of closed sales of existing single-family homes in January fell 10% to 254,110 from the revised 282,490 recorded in December. The level of homes sold fell to the lowest level in 13 months and the double-digit month-to-month decline was the biggest dip in 30 months. On a year-over-year basis, statewide home sales decreased 1.9% and registered their first drop in eight months. With rates trending down in the past five weeks, home sales activity could see some improvement at the end of the first quarter if rates continue their declining trend.

Housing supply jumps at the start of the year: After dipping for the first time in 12 months in December 2024, new active listings at the state level bounced back with the sharpest year-over-year growth rate in 45 months. While the number of newly added properties remained below the pre-pandemic level in early 2020, the latest figure recorded last month was the five-year high for a January. New active listings, in fact, had the largest monthly growth rate in at least the last seven years. The surge in new for-sale properties last month resulted in a jump in the state’s unsold inventory index. Total active listings also had the highest year-over-year growth rate in two years and increased on a month-to-month basis at an unseasonally strong pace. The solid rebound in housing inventory was due partly to the recent slowdown in market activity though. As the housing market continues to gear up for the spring homebuying season, housing supply will likely grow further in coming months.

Single-family rent growth registers below long-run trend rates in 2024: U.S. single-family home rent prices went up in December by 1.8% year over year, the lowest growth pace recorded in about four years, according to the latest CoreLogic Single-Family Rent Index. For the year as a whole, single-family rent growth had an average of 2.6% in 2024, a level below the 2010-2020 average of 3.5%. Prices for detached rentals grew 1.7% year over year, while attached properties increased by 1.8%. High-priced rental units experienced a faster growth rate, with an increase of 2.4% year over year, as compared to low-priced rental units which had a gain of 1.7% from a year ago. Of the metropolitan areas surveyed, Washington D.C. (+5.6%), Detroit (+5.5%), and Chicago (+5.1%) had the highest growth rates in December. With the job market remaining healthy and the demand for rental expected to remain solid, rent growth could remain steady or improve further in 2025.

Housing starts retreat in January as weather weighs on construction: U.S. housing starts fell sharply to start the year as harsh winter weather disrupted residential construction in January. Total housing starts plunged 9.8% from the prior month and was down 0.7% from the same time last year, according to the latest release from the Census Bureau. The steep monthly decline was attributed partly to the normalization following an outsized increase in December amid recovery from hurricanes, but snowstorms and freezing temperatures also had a distortion effect on housing activity last month. The contrast in housing starts movement between regions was evident that the decline in starts was weather-related. Northeast, Midwest, and the South - where the adverse weather hit the hardest, dropped sharply by double-digits in each region. Homebuilding in the West, on the other hand, surged 42.3% month over month. Looking ahead, an inch-up in permits may suggest a slight bounce-back in construction activity in the coming months, but elevated interest rates, tariffs, and new immigration policies could put a drag on home buildings in the road ahead. In fact, the February builder sentiment index released by NAHB/Wells Fargo fell sharply and dropped to the lowest level in five months as developers became increasingly more concerned about prices of building materials and labor shortage in the construction industry.

Consumer sentiment dips to 15-month low: U.S. consumer sentiment extended its decline for the second straight month and plunged nearly 10% from January, according to the February’s Survey of Consumers released by the University of Michigan. The survey’s Consumer Sentiment Index declined to 64.7 from January’s 71.7 and was the lowest reading since November 2023. All five components that make up the index dipped in February, with expectations on personal finances and the short-run economic outlook both falling by nearly 10%. Fears of tariffs that could potentially drive up inflation were the driving force for the decline, as respondents to the survey saw inflation over the next 12 months rising to 4.3% in February from 3.3% in January. The latest reading on inflation expectations was the highest since November 2023 and the increase was widespread across income and age groups. With trade policies likely to remain uncertain in coming months, consumer sentiment may continue to fluctuate in the near term. 

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