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
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Median single-family home prices rose in 2024, following historical seasonal trends. Single-family home prices in Santa Cruz saw the largest gain, up 20%. Conversely, Santa Cruz condo prices experienced the largest contraction, down 18%.
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Total inventory fell 36.9% month over month, dropping inventory to a record low. We expect inventory to continue to decline in January and the overall market to slow due to lack of supply.
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Months of Supply Inventory indicated a sellers’ market for single-family homes and condos with the exception of Santa Cruz condos, which is more balanced.
Note: You can find the charts/graphs for the Local Lowdown at the end of this section.
The median single-family home prices are up year over year
In Silicon Valley, home prices haven’t been largely affected by rising mortgage rates after the initial period of price correction from April 2022 to January 2023. Low, but growing inventory and high demand have more than offset the downward price pressure from higher mortgage rates. Year over year, single-family home prices increased 5% in San Mateo, 7% in Santa Clara, and 20% in Santa Cruz. Prices typically peak in the summer months, and the mild contraction after the post-summer peak has fallen in line with expectations. Home prices in Santa Clara may reach new all-time highs in 2025, but it’s unlikely that San Mateo and Santa Cruz will.
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.
Sales far outpaced new listings in December, dropping inventory to all-time lows
The 2024 housing market looked progressively healthier with each passing month until Q4. The promising build in inventory during the first nine months of the year was wiped out, and Silicon Valley inventory fell to record lows in December.
In 2023, single-family home and condo inventory followed fairly typical seasonal trends, but at significantly depressed levels. Low inventory and fewer new listings slowed the market considerably last year. Even though sales volume 2024 was similar to 2023, far more new listings came to the market, which has allowed inventory to grow. Condo inventory even reached a four-year high in September before declining in Q4. For single-family homes, inventory is down 20% year over year, because inventory fell 60% in Q4 as new listings declined at a greater magnitude than sales.
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. It’s looking like 2024 inventory, sales, and new listings will resemble historically seasonal patterns. However, single-family home inventory is once again near record lows.
Months of Supply Inventory indicated a sellers’ market in December
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). The Silicon Valley market tends to favor sellers, which is reflected in its low MSI. In 2024, Silicon Valley MSI moved higher, particularly in Q2. In Q4, MSI dropped across markets. MSI indicated a sellers’ market for single-family homes and condos with the exception of the Santa Cruz condo market, which is more balanced.
