2024 Year In Review

The Egyptians were pioneers in developing a calendar that tracked the solar year, marking the passage of time through the heliacal rising of the star Sirius. This event coincided with the annual flooding of the Nile River, a natural cycle that played a vital role in determining the length of the year. The concept of the New Year holds profound significance for the human spirit, symbolizing the power of new beginnings. Just as the Nile’s floods brought fertile soil and replenished reservoirs to sustain life throughout the year, the start of a new year presents an opportunity for growth and renewal. May this new year bring you great prosperity and abundance.

• Interest Rates

• Supply Levels

• California Fire Insurance Struggles Continue

• Can President Trump take Fannie Mae and Freddie Mac Private?

• What We Expect to See in 2025

Interest Rates

The year ahead is shaping up to be a turbulent one for mortgage rates. As we mentioned in our previous newsletter, the 10-year Treasury bond (T10) serves as a key indicator for long-term interest rates, including mortgage rates. Recently, the T10 reached a 52-week high of approximately 4.8%. This rise can be attributed to several factors.

First, a slight reduction in holdings by major foreign investors such as China and Japan has led to increased yields, as investors seek higher returns on U.S. debt. This is partly due to concerns about fiscal policy, with annual interest payments now matching the entire defense budget. The U.S. national debt has surpassed $36 trillion, and to manage that debt, the government must issue more debt each year. This has created a perception of increased risk for U.S. Treasuries, which in turn drives yields higher. While U.S. securities remain a highly sought-after safe haven, it’s important to acknowledge the market consequences of the country’s current fiscal situation, suggesting that we may face a "higher for longer" environment.

Second, the resilience of the labor market is contributing to the higher rate environment. December's job report showed a gain of 256,000 jobs, reducing the unemployment rate to 4.1%. This stronger-than-expected job growth indicates an economy robust enough to support higher interest rates. While we’ve seen revisions to such reports before, these positive signals have sent ripples through the bond market, as they suggest that a Federal Reserve rate cut is less likely. In 2025, the labor market will likely remain a key focus. If it begins to soften, the Fed may have to implement more cuts than recently projected.

Analysts predict that the average 30-year fixed mortgage rate will stay between 6.2% and 6.6% in 2025, similar to the rates observed in 2024. Recent inflation news brought some relief, with core inflation coming in better than expected. However, there’s still a risk of rates rising if inflation doesn’t continue to show improvement. I believe the recent market reactions may have been somewhat overstated, particularly with the potential impacts of new policies under the Trump administration. President Trump has been vocal about proposing tariffs, some of which economists consider inflationary. Whether these tariffs are implemented, and whether they lead to higher prices for consumers, remains uncertain. Ultimately, though, the key factor will be the health of the labor market. If it weakens, we may see rates decline. If it remains strong, current mortgage rate levels are likely to hold steady for the foreseeable future.

Supply Levels

As we enter the new year, inventory levels will continue to be a focal point, with demand remaining strong despite mortgage rates hovering in the mid-6% range. As you can see in the chart below, there was a notable increase in inventory late last summer, likely a response from sellers to the June headline, “Santa Clara County Home Prices Exceed All-Time Highs in May.” This marked the first time median home prices across the county surpassed $2,000,000.

However, alongside this surge in inventory, we were also witnessing signs of buyer fatigue, as many had expected the Federal Reserve to begin cutting rates in June. The delay in those cuts, combined with consistently rising home prices, led to a slowdown in buyer activity over the summer. As a result, the median home price dropped from $2,035,000 in May to $1,825,000 in August. When the Fed finally cut the Fed Funds rate by 50 basis points in September, mortgage rates had already fallen in anticipation. Prices quickly rebounded, but as we neared election day, the 10-year Treasury bond (10T) began to rise, pushing mortgage rates higher once again.

*MLS data provided | Single Family Homes | Santa Clara County

Fast forward to the first few weeks of January, and the year seems to be starting strong. In the South Bay, we're reporting 150-200 people attending open houses, and the “months of supply” metric—a key indicator of market conditions—has dropped to a year-low. Months of supply refers to the number of months it would take to sell all the active listings in the market at the current sales pace. To calculate this, we divide active listings by homes sold per month.

Across the country, 4-6 months of supply is considered the neutral point between a buyer's and seller's market. In the Bay Area, we typically hover between 1-2 months of supply, and in November and December 2024, we fell below 1 month of supply (0.9). The total number of new listings increased from 8,484 in 2023 to 10,208 in 2024. While this increase has helped more buyers find the right home, we still fall roughly 15% below the averages from 2016-2022.

*MLS data provided | Single Family Homes | Santa Clara County

In conclusion, any increase in supply is quickly absorbed by rising demand. As we've discussed before, millennials continue to drive housing demand, accounting for 38% of all home purchases. Many are now in their peak household formation years, and for context, there are now more 35-year-olds in the U.S. than ever before. This demographic shift puts significant pressure on the demand for homeownership, especially in areas like the Bay Area, where supply is still lagging.

California Fire Insurance Struggles Continue

California's insurance market, particularly in areas prone to wildfires, is undergoing reform, driven by the Sustainable Insurance Strategy introduced by Commissioner Ricardo Lara. The goal of these reforms is to address the growing challenges posed by an increased risk of wildfires and the accessibility and affordability of insurance in high-risk zones. Although proposed in 2022 it was intended to be rolled out in two phases, the first phase in 2023 and the second phase at the end of last year. 

One of the central focuses of the reforms is to increase insurance coverage in wildfire-affected areas. Insurers are being encouraged to expand their offerings, moving away from reliance on the California FAIR Plan—the state's insurer of last resort that has become more and more popular as homeowners are left with fewer and fewer options. To achieve this, reforms allow for the use of advanced catastrophe modeling in rate-setting, enabling insurers to use predictive data for pricing policies based on future risks rather than having to prove premium increases on historical data. This change is intended to make pricing more accurate, reducing cancellations and ensuring that Californians in high-risk areas can access insurance more easily. 

These reforms also attempt to modernize the FAIR Plan, which provides coverage for homeowners who cannot find insurance in high-risk areas. Without the ability to price premiums based on a more comprehensive understanding of risk, insurance companies were less inclined to offer coverage in areas prone to wildfires, leading to a reliance on the FAIR Plan. This plan, while providing a safety net, often comes with very high premiums and limited coverage options, not fully addressing the needs of consumers in high-risk areas. While higher rates may be inevitable, these adjustments aim to stabilize the insurance market in the long run, ensuring that insurers remain financially viable and can continue to offer policies in areas vulnerable to natural disasters like wildfires.

However, challenges persist. Some critics argue that the reforms do not go far enough in addressing the underlying issues of risk pricing and market competition. Insurers may still find the new regulations too restrictive, and some homeowners may face higher premiums and limited coverage, especially in the most fire-prone regions. Moreover, any continued reliance on the FAIR Plan could drive up costs for the entire state, as insurers are required to contribute to its funding.

In conclusion, California's ongoing insurance reforms seek to make coverage more accessible and affordable while addressing the complex risks posed by wildfires. While the ultimate success of these reforms will depend on a delicate balance between insurer participation, consumer protection, and risk management, they represent a necessary step toward stabilizing the state's insurance market and providing more sustainable options for homeowners in high-risk areas.

Can President Trump take Fannie Mae and Freddie Mac Private?

The potential privatization of Fannie Mae and Freddie Mac under a new Trump administration has become a hot topic. Especially after billionaire investor Bill Ackman expressed confidence in this incoming administration’s plans earlier this month. He claimed that a successful emergence of Fannie and Freddie from conservatorship would generate more than $300 billion of additional profits to the federal government, while removing some $8 trillion in liabilities from the government’s balance sheet. To better understand what this could mean for lending, rates and home values let's first dive into the history and significance of these two giants.

Fannie Mae, officially known as the Federal National Mortgage Association, was established in 1938 during the Great Depression. Its mission was to provide a secondary market for mortgages, making home loans more accessible by buying mortgages from lenders, thus enabling them to lend more. Initially a government entity, it became a publicly traded company in 1968. 

Freddie Mac, or the Federal Home Loan Mortgage Corporation, followed in 1970, created to foster competition in this secondary mortgage market. Like Fannie Mae, it was designed to purchase, package, and sell mortgages as securities, ensuring liquidity for lenders. It transitioned to a publicly traded company in 1989.

Both entities were designed to support the dream of homeownership by stabilizing and expanding the housing market. However, they operated with an implicit government guarantee, which meant markets believed the government would step in if they faced financial distress.

The 2008 financial crisis changed everything. Both companies, deeply entangled with the subprime mortgage market, faced insolvency. To prevent a collapse that could ripple through the entire economy, they were placed under government conservatorship in September 2008. This meant the government, via the Federal Housing Finance Agency (FHFA), took control of their operations to stabilize them and protect taxpayers.

Fast forward to now, with whispers of privatization under the Trump administration, the implications are significant and it will not be an easy task. Despite both companies once being private entities before their conservatorship. Many fear privatization could lead to higher mortgage rates as these companies may no longer benefit from the perceived government backing, which historically allowed them to borrow at lower rates. This could make home buying more expensive or limit access to credit for some. While proponents argue that privatization could spur innovation in mortgage products and increase efficiency. 

The move could lead to one of the largest IPOs in US history, offering investors significant opportunities. However, it would also mean these companies would operate without the safety net of government support during economic downturns. Much of the debate will center on how much government involvement is necessary to protect consumers and the housing market. 

A hybrid model where Fannie Mae operates as a private company with a government guarantee could combine private-sector efficiency with public stability. In this model, Fannie Mae would be profit-driven but backed by a government safety net to maintain liquidity in times of crisis (similar to FDIC). However, the approach would need to ensure that the government’s guarantee does not distort the market or encourage risky behavior. 

As we stand at this crossroads, the potential privatization of Fannie Mae and Freddie Mac is not just about returning to roots but reimagining their place in America's housing finance system. The process would need to balance the interests of investors, homeowners, and the broader economy while ensuring the lessons of 2008 are not forgotten. Whether this change occurs, how it's structured, and its impact on everyday Americans looking to buy a home will be one of the most watched financial stories of this decade.

What do we expect to see in 2025?

Keep a close watch on the labor market throughout the year. When I wrote the Year-End Review last year, the unemployment rate stood at 3.7%, but now we find ourselves at 4.1%. Despite the Federal Reserve maintaining restrictive rates to combat inflation, any significant job losses could force the FED to pivot. There are already signs that the labor market is weakening, with job creation in the private sector stagnating, while government and healthcare sectors remain the primary sources of job growth.

In terms of supply, we expect a modest increase in new listings, but demand will likely outpace any gains in inventory. I predict that median prices in Santa Clara County will surpass the $2,035,000 historical peak (set in May 2024) within the first three months of the year, as sidelined buyers reenter the market. Later in the year, prices will be influenced by interest rates—if they dip into the low 6% range or even the high 5% range, the seasonal dynamics could change significantly.

Please don't hesitate to reach out to us for any insurance needs. We have a network of trusted contacts and would be happy to help you secure the best coverage available. Lastly, our thoughts are with all those impacted by the recent fires in LA County.