The Big Story
Elevated rates are here to stay
Quick Take:
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Home prices declined modestly in Q4 2024, showing atypical price stability in the second half of the year. Because prices didn’t contract significantly in the second half of 2024, they will easily rise to new highs in 2025.
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Since September 2024, the Fed has cut rates by 1%, bringing the interest rate that banks charge each other for short-term loans to a range of 4.25% to 4.5%. In 2025, we only expect the federal funds rate to decline by another 25 to 50 bps.
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Sales rose 4.8% month over month, the swiftest pace since March. Sales accelerated 6.1% from one year ago, the largest year-over-year gain since June 2021. At the same time, inventory fell 2.9% but is still near its highest level in the past four years. Higher inventory levels created more opportunity for sales.
Note: You can find the charts & graphs for the Big Story at the end of the following section.
*National Association of REALTORS® data is released two months behind, so we estimate the most recent month’s data when possible and appropriate.
Economic (policy) uncertainty elevated mortgage rates
The Federal Reserve’s interest rate cuts in 2024 provided some relief to some borrowers, but mortgage rates have remained stubbornly high. As of January 2, 2025, the average 30-year fixed-rate mortgage climbed to 6.91%, its highest level in nearly six months, according to Freddie Mac. Even with the Fed lowering the federal funds rate by a full percentage point over the past four months, mortgage rates have not fallen proportionally, remaining about 0.3 percentage points higher than their 6.6% average in January 2024.
This disconnect is largely due to factors beyond the Fed's control, such as economic growth, inflation concerns, and fluctuations in the 10-year Treasury bond yield, which heavily influence mortgage rates. Economists predict that meaningful relief for homebuyers is unlikely in 2025, with rates expected to remain elevated between 6% and 7%. Lawrence Yun, chief economist at the National Association of Realtors, forecasts the average 30-year fixed mortgage rate will hover around 6.5% throughout the year.
Adding to the uncertainty, President-elect Donald Trump's proposed economic policies — potentially including sweeping tariffs on foreign goods and additional tax cuts — could reignite inflation. If inflation accelerates, the Fed will almost certainly curtail rate cuts. However, some analysts suggest Trump's tariff threats may be strategic bargaining tools in trade negotiations rather than definitive actions. If inflation continues to ease, the Fed could maintain its trajectory of lowering rates in 2025. At its December meeting, the central bank projected two additional rate cuts for the year, down from its earlier expectation of four. Inflation increased over the past two months, so we are inclined to side with the Fed’s assumption that two rate cuts are prudent in 2025.
Despite economic policy uncertainty and increasing mortgage rates, home sales have increased substantially over the past two months. We attribute this rise to two main factors: much more inventory and the market’s acceptance of higher mortgage rates. Higher inventory has allowed potential buyers to more easily find the home that’s right for them with less competition, creating a better all-around buying experience. Additionally, buyers and sellers have broadly accepted that rates will be higher than they might like for some time, and waiting for rate drops isn’t worth the time anymore. There is also a potential third factor around economic sentiment; roughly half the country thinks more highly of the economy due to the incoming administration. For better or worse, vibes are important, and buying a home is often as much or more of an emotional choice as it is a financial one.
Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.
Big Story Data
The Local Lowdown
Quick Take:
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The median single-family home price declined in December, which is normal this time of year. We expect price contractions in January 2025 before climbing higher from February to June.
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Inventory declined in December but has largely maintained the massive inventory gains from the first 10 months of the year. More homes on the market only benefits Orange County, which has been extremely undersupplied for the past four years.
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Months of Supply Inventory trended upward in 2024, closing out the year at three months of supply. MSI now indicates the market is more balanced between buyers and sellers.
Note: You can find the charts/graphs for the Local Lowdown at the end of this section.
The median single-family home price fell month over month, typical for December
In Orange County, single-family home prices hit a record high in June 2024, reaching $1.45 million. High demand relative to the low, but growing inventory has kept prices moving higher even during a time of elevated mortgage rates. High mortgage rates have slowed sales volume, but that hasn’t significantly decreased the sticker price of homes. Prices in Southern California generally haven’t experienced larger drops due to higher mortgage rates, given the evergreen demand in the area. December saw the 18th consecutive month of year-over-year price growth for single-family homes. Prices typically peak in the summer months, and the mild contraction after the post-summer peak has fallen in line with expectations. We expect some minor price contraction in January 2025 before rising into the spring and summer months.
High mortgage rates soften both supply and demand, but homebuyers and sellers seemed to tolerate rates near 6% much more than around 7%. Mortgage rates fell significantly from May through September, but rose significantly in the fourth quarter of 2024. Now, rates are far closer to 7% than 6%, so we expect sales to slow further.
Inventory declined slightly month over month
Total inventory in Orange County fell 85% from July 2019 to January 2022 before building again as mortgage rates rose, pricing potential buyers out of the market. Low inventory and new listings, coupled with high mortgage rates, have led to a substantial drop in sales and a generally slower housing market. Typically, inventory begins to increase in January or February, peaking in July or August before declining once again from the summer months to the winter. In 2023, inventory patterns didn’t resemble the typical seasonal inventory peaks and valleys.
Inventory in 2024 resembled historical seasonal patterns, as inventory grew considerably. Inventory increased 36% in 2024, putting the markets in a far better position as we enter 2025.
Months of Supply Inventory in December indicated that the Orange County housing market was balanced
Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The long-term average MSI is around three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). MSI was below three months from February 2023 to August 2024, but it rose to 3.1 months of supply in September 2024. In October, MSI fell slightly to three months of supply, implying the market was balanced, before declining further in November. In December, MSI rose back to three months of supply, implying the market was balanced.
Local Lowdown Data
