September 02, 2024 – Latest macroeconomic data released last week suggest that the economy remains solid, with the cooling trend in inflation continuing at the start of Q3 2024. Both consumers and business leaders feel upbeat in general and have a positive outlook about the near future. With the Fed expected to adjust rates downward in their next few meetings, the housing market should pick up some momentum throughout the rest of the year. There are challenges that could hinder the housing progress in the next couple years though. The ongoing insurance crisis, for example, is one such huddle that has presented difficulties for homebuying and could remain a major headache for the market in at least the next couple of years.

Consumers feel more positive with expectations of future improve: The Conference Board Consumer Confidence Index climbed again in August to 103.3 from an upwardly revised 101.9 in July, as consumers felt slightly more upbeat about the future. The Present Situation Index bounced back from 133.1 in July to 134.4 in August, while the Expectation Index improved from 81.1 in the prior month to 82.5 in the current month. Consumers’ perception of the economy was likely affected by the July jobs report and the stock market’s volatility exhibited in early August, as they were more pessimistic about the labor market outlook and slightly less positive about their future income. Their views about a possible recession, however, remained unchanged and were well below the 2023 peak. Nearly one-third (31.5%) of consumers expected lower rates over the next 12 months, the highest since April 2020. Despite interest rates dropping to the lowest level since May 2023, those who planned to purchase a home fell to a new 12-year low. The share will likely bounce back in coming months, however, if rates continue their downward trend in the next few weeks.

Business leaders remain cautiously optimistic for the future: CEO’s optimism declined from 54 in Q224 to 52 in Q324 as business leaders downgraded current conditions in the latest quarter, according to the Conference Board Measure of CEO Confidence. The index remained above 50 for the third consecutive quarter, nevertheless, an indication that there were more positive responses than negative responses. CEOs were less upbeat likely due to the delay in rate cuts and the recent slowdown in consumer spending. A quarter (26%) of CEOs said that general economic conditions were worse than they were six months ago, an increase from 16% reported in Q224. However, the share of CEOs expecting a recession dipped to 30%, a decline from 35% in Q224 and a sharp drop from 84% in Q323. In fact, nearly one-third (32%) in Q324 expected the economy to improve over the next six months, up from 30% in the prior quarter. When asked about risks impacting their industries, CEOs ranked “Cyber” (59%) at the top of the list, followed by “Geopolitical instability (52%), and “legal and regulatory uncertainty” (46%). 

Allstate receives approval to increase homeowner insurance rates by 34%: The California Department of Insurance approved Allstate to raise homeowner insurance rates by an average of 34.1% across the state. The increase is the largest in California for any major insurance company in the past three years. The rate increase will affect more than 350,000 policy holders and Allstate customers will see their premium increase on their bills at their first renewal date on or after November 7^th. The rate changes vary between a decrease of as much as 57% to an increase of nearly 650%. Allstate is hardly the only insurer with a major rate hike this year. In March, Liberty Mutual/Safeco was also approved to increase rates by an average of 10.5%, while State Farm got an average increase of 20% that went into effect the same month. State Farm has since requested another 30% rate hike that is pending for approval. With insurance premiums expected to increase sharply this year and possibly next year, housing affordability just got a bit more challenging for homebuyers.

Insurance crisis creates challenges for homebuyers: Survey results from C.A.R.’s 2024 Housing Market Survey, indeed, confirm that the current insurance situation in California is making it more challenging for homebuyers. Data collected in early August suggests that 31% of the buyers in the state had difficulties obtaining homeowners insurance when purchasing their house, a jump from 17% recorded in 2023. Of those who encountered difficulties obtaining insurance, 45% of them had issues with premiums being too expensive, while 30% of them were simply denied by their insurers. As a result, over two out of ten buyers ended up getting insurance coverage from the California FAIR Plan, the state-created but privately run insurer that is meant to be the “insurer of last resort.” Their plan, however, could see a ‘substantial’ rate hike as well in the near future.

Fed’s preferred inflation gauge in line with expectation: The personal consumption expenditure price index (PCE) – the Fed’s favorite inflation indicator – increased 0.2% on a month-over-month basis in July and was up 2.5% from a year ago, according to the Department of Commerce. Excluding food and energy, the core PCE recorded a 2.6% year-over-year increase, which was better than the consensus expectations of 2.7%. Goods prices remained virtually unchanged from the prior month, while services edged up 0.2% month-over-month. The latest PCE reading provides more proof to Fed officials that inflation continues to cool and the market priced in a 100%-chance as of August 30^th that a rate cut will occur in the next FOMC meeting in September. The only uncertainty is whether the U.S. central bank will reduce its policy rate by 25 basis points (bps) or 50 bps. Despite the encouraging news, interest rates actually ticked up slightly, with the average 30-year fixed rate mortgage climbing 0.2% on Friday. Bond traders had already anticipated the modest price increase and might not have considered the latest inflation reading consequential in the bigger picture. A three-day weekend before the end of the month, which means low volume and light liquidity, might have played a role as well.

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