As we move through the final quarter of the year, my October 2024 real estate market update provides critical insights into how Berkeley’s housing market is adapting to shifting economic conditions. Despite signs of softening from pandemic highs, the local market remains competitive, with properties still selling quickly and often above asking prices. However, macroeconomic factors – including inflation trends, rising mortgage rates, and ongoing geopolitical uncertainties – are significantly influencing both buyer behavior and seller expectations. In this article, I’ll explore the latest economic data, the Federal Reserve’s potential policy shifts, and how these dynamics impact the real estate landscape in Berkeley and the larger inner east bay area for the remainder of 2024 and beyond.
Current Market Conditions
Economic indicators show inflation is moderating, but pressures remain. The Consumer Price Index (CPI) rose 0.2% in September, bringing the annual inflation rate to 2.4%, a slight improvement over the prior period. However, core inflation – excluding food and energy – grew by 0.3% for the month and 3.3% year-over-year, indicating persistent challenges in controlling inflation. Shelter costs, including rent and owners’ equivalent rent, were key contributors, though their growth rate slowed to 0.3% month-over-month, down from the 0.5% observed in the August period.
The Producer Price Index (PPI) for September 2024 remained flat month-over-month, with a year-over-year increase of 1.8%. This stability in the PPI reflects easing inflationary pressures within the supply chain. Core PPI, which excludes volatile food, energy, and trade services, rose by just 0.1% for the month, demonstrating a slowdown compared to previous periods. The core PPI’s year-over-year increase was 3.2%, signaling that while inflation is moderating, some costs in the production process remain elevated.
A key factor in this cooling PPI was reduced cost pressures in core goods, with sectors like transportation and some manufacturing seeing slight declines. While the easing PPI is a positive signal for inflation overall, it underscores that certain service categories – such as healthcare and insurance – are still driving costs higher. This trend suggests that while supply chain disruptions have diminished, inflation has shifted toward services, which tend to be more persistent and closely tied to labor market dynamics.
The slowdown in PPI growth is significant for housing and real estate because lower wholesale costs could eventually translate to reduced input costs for construction and home repairs, alleviating some pressure on prices. However, given that shelter costs remain elevated in the CPI, it will take time for these improvements in the supply chain to influence real estate markets meaningfully.
The most recent labor market data for September 2024 shows signs of cooling, reflecting a slowdown in job creation and a slight rise in unemployment. Employers added 254,000 jobs during the month, a strong number but below earlier highs. The unemployment rate ticked up to 4.1%, marking the highest level since January 2022. This increase in unemployment, alongside modest wage growth of just 0.2% month-over-month, suggests that the labor market may finally be softening after a prolonged period of tightness.
September’s report also highlighted revised figures for previous months, with August’s job additions revised down to 165,000. This cooling labor market aligns with the Federal Reserve’s goal of reducing inflation without causing a sharp economic downturn. However, the decline in the labor force participation rate indicates that fewer people are actively engaged in the labor market, which could present challenges to future growth if the trend continues.
What’s Next for the Fed?
Following the 0.5% rate cut in September 2024, the Federal Reserve is expected to take a cautious and measured approach as it evaluates the economic landscape. The decision to reduce rates came in response to signs of a slowing labor market and softening inflation, with the goal of supporting economic growth without reigniting inflationary pressures. However, future rate decisions remain uncertain, and the Fed has emphasized that upcoming economic data will be crucial in determining the next steps.
The labor market also plays a key role in the Fed’s calculus. With the unemployment rate rising to 4.1% in September, the Fed acted preemptively to stabilize the economy. The central bank hopes to balance labor market conditions without triggering a recession, which would complicate their goal of achieving price stability. Further weakening in employment data or wage growth could pave the way for additional rate cuts early next year .
Analysts currently anticipate that the Fed will likely be cautious regarding further cuts for the remainder of 2024 while carefully monitoring economic developments. While there is room for more easing over the next 2 months and into early 2025, the Fed will need to see sustained improvements in inflation and a continued softening of the labor market to justify additional reductions. For now, the consensus is that the Fed will hold rates steady at the next meeting, waiting to assess the full impact of September’s rate cut and other evolving macroeconomic conditions.
Global geopolitical events, including energy market disruptions and military conflicts, further complicate the outlook. These factors influence inflation expectations and bond market movements, which in turn affect mortgage rates. If inflation continues to slow, mortgage rates could stabilize or decrease, providing relief to prospective homebuyers.
And of course the upcoming election is a final confounding factor. Both parties have suggested increased spending with the republican platform and it’s plan for higher tariffs likely to lead to greater federal borrowing and thus higher bond yields. While the long-term economic implications of these policies is not clear, when bond prices decline (to attract more buyers), interest rates tend to increase as available funds for investment become increasingly scarce.
Impact on the Real Estate Market
The Fed’s balancing act will have a significant impact on mortgage rates, the housing market, and broader economic sentiment. If inflation continues to cool and labor markets stabilize, mortgage rates may begin to ease, providing relief to homebuyers. However, any shift in inflation due to increased government spending or unexpected economic shocks could force the Fed to rethink its strategy, keeping markets on edge as 2024 draws to a close.
Mortgage rates have risen in tandem with Treasury yields, driven by the Fed’s policy outlook and global economic uncertainties. The average 30-year fixed mortgage rate exceeded 7% in October 2024 after declining to around 6% the prior month, making it challenging for many buyers to qualify for loans. Additionally, elevated rates are reducing affordability, causing many buyers to pause their home searches or pursue lower-priced properties.
These higher mortgage rates and uncertainty regarding the presidential election are reshaping the inner east bay real estate market. While the area’s desirability and limited inventory continue to support property values, both buyers and sellers need to adjust expectations. Sellers may need to price homes more competitively and expect more days on market (DOM), as buyers face tighter budgets due to higher borrowing costs. Conversely, cash buyers or those with significant down payments still have leverage in negotiations.
If mortgage rates stabilize, the market may see an uptick in buyer activity, but much depends on the broader economic environment. Buyers waiting on the sidelines may re-enter the market, increasing competition. However, the pace of recovery will depend on the Fed’s monetary policy and the resolution of global economic uncertainties.
Conclusion
In summary, my current read of the situation is that economic indicators suggest cautious optimism. While inflation appears to be easing, shelter costs remain a significant factor. Berkeley’s housing market is likely to remain competitive but price-sensitive in the months ahead. Both buyers and sellers should stay informed on economic developments and be prepared to adapt to changing market conditions. As always, please reach out to discuss your specific needs and learn more about how I can help you navigate this challenging and constantly evolving market.
