January 13, 2025 – Southern California had a rough week to start the new year, with four major fires burning in L.A. County, forcing thousands to evacuate. The devastating blazes have incinerated more than 10,000 structures and will likely be one of the costliest in U.S. history. While the conditions have shown some slight improvements in the past couple days, the danger is far from over as more strong winds are expected this week. We hope the fires will be under control very soon and hope everyone stays safe.

Devastating wildfires sweep through Southern California: The wildfires in LA County have destroyed almost 10,000 properties in the last few days and nearly 180,000 people were ordered to evacuate. The devastation resulting from the disasters will lead to a pullback in housing activity in the LA market and home sales in the immediate areas will come to a halt in the near term. Housing demand in the affected cities will take time to recover but the overall LA market should begin to bounce back later in the spring homebuying season. The loss of thousands of homes will tighten up housing supply in the affected areas and their surrounding neighborhoods, and upward pressure could apply to home prices later this year in the surrounding neighborhoods as housing demand begins to recover. Rents in those neighborhoods will go up in the next few months as demand for rental units surges. Economic activity in the affected areas will slow in at least the next six months but will pick up in late 2025 or early next year when the rebuilding starts. The wildfires in L.A. could also deepen the insurance crisis in Southern California and may lead to higher insurance costs for homeowners.  

December housing sentiment dips from the prior month but remains higher than levels seen a year ago: Home Purchase Sentiment released by Fannie Mae decreased 1.9 points in December and remained substantially higher than the level recorded 12 months ago. The index dipped slightly to 73.1 from November but was up solidly by 5.9 points from 67.2 recorded in December 2023. The share who said that it is a good time to buy declined by 1 point to 22% last month, as the average 30-year fixed rate continued to rise since early December. Despite their recent upward movement, consumers remained optimistic about the direction of mortgage rates in 2025, as 42% of the respondents continued to expect rates to decline over the next 12 months. The share is a drop from 45% recorded in the prior month but is much higher than the 31% registered in December 2023. With interest rates rising sharply after the latest jobs report, however, consumer sentiment about the direction of rates could pull back further in the January survey.

Job growth exceeds expectations in December: The latest employment report came in much stronger than expected, with nonfarm payrolls increasing 256k in December, the highest reading since March 2024. The surge in jobs last month exceeded the 155k projected by the Dow Jones consensus. Most of the job growth was in health care (+46k), leisure and hospitality (+42k), and the government (+33k). Retail also saw a nice bounce back of 43k, after dropping 29k in November. Manufacturing (-13k) dipped again last month after a decent bounce back of 25k jobs in November. The unemployment rate surprisingly improved, with the December reading dipping 0.1 percentage points from the previous month to 4.1% and beating the consensus expectations also by 0.1 percentage point. The solid gain in job creation also translates into earnings growth, with average hourly wage rising 0.3% month-over-month and 3.9% year-over-year. With the labor market’s strength coming in stronger than anticipated, a rate cut in the upcoming FOMC meeting in late January is off the table, and a downward adjustment in rate in March also seems questionable.  

Mortgage rates soar after strong jobs report: Mortgage rates climbed higher after December job growth came in stronger than expected. With the U.S. economy adding nearly 10k more jobs than the consensus of 155k, the news sent bond yields and mortgage rates higher as the market expected the Fed to pause on rate cuts possibly in the next two meetings. Yields on 10-year Treasury have gone up by slightly more than 10 basis points (bps) to 4.8%, while the average 30-year fixed rate mortgage has climbed 11 bps to 7.26% in the past two days after the release of the jobs report. With December’s Consumer Price Index scheduled to be released on Wednesday, mortgage rates could see more fluctuations in the week ahead.

Consumer expectations on short-term inflation unchanged but job turnover expectations decline: Consumers expectations on inflation at the short-term remained the same as the prior month in December, but medium-term increased while the longer-term decreased, according to the latest New York Fed’s Survey of Consumer Expectations. At the one-year horizon, the median inflation expectation was at 3.0% in the last month of 2024, the same as what was recorded in November and was unchanged from the 3.0% recorded in December 2023. Consumers also expected home prices to increase 3.1% a year from now, a slight increase from the 3.0% recorded in the prior month and the same month of last year. Their expectations on the labor market came in mixed, with the likelihood of losing one’s job in the next 12 months dipping 1.6 percentage point from the prior month to 11.9% in December, but the median one-year-ahead expected earnings growth also declined by 0.2 percentage point to 2.8%. The mean perceived probability of finding a job if one’s current job was lost also fell sharply from 54.1% in November to 50.2% in December. The share was the lowest since April 2021, which could be an indication that job seekers are becoming more concerned about job opening availability.

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