First, the good news.

Stock markets are at all-time highs.  Good news.

The Labor Department reported that the unemployment rate remained at a low 4.3%.  Good news.

Consumer spending, which accounts for roughly two-thirds of the economy, rose 0.5% in April. While slightly below March’s pace, economists describe it as a resilient showing. Strong consumer spending helped support the labor market, which added 172,000 jobs in May.  Good news.

I just got back from Washington DC and Congress is negotiating the final details of two very positive housing bills.  The More Homes on the Market Act will double the deduction against equity gains from $250,000 for singles and $500,000 for couples, to $500,000 and $1 million.  The 21st Century Road to Housing Act  contains more than 45 provisions, rolled together from bills by lawmakers in both chambers, that includes measures to waive environmental review requirements for some housing construction projects, encourage the renovation of aging homes, and incentivizes communities to build more housing.  Both Bills are GOOD NEWS for homeownership.

On the other hand: Economists often view these same reports as both good news and bad news. It can be difficult to please economists—and economists populate the Federal Reserve.  Instead of good news pushing decisions to lower interest rates, they may do the opposite, possibly three increases this year.

Not good news.

Consumer spending fuels our economy.  How do consumers feel about the economy?   According to the Univeresity of Michigan Consumer Sentiment Survey, overall consumer sentiment hit a historic low in April and fell further in May.  Not good news.

The Federal Reserve Bank of St. Louis has an interesting graph that uses both Fannie Mae data and the University of Michigan’s Consumer Sentiment Index.    The graph below specifically graphs how consumers feel about buying a home.  Latest sentiment readings are not good news.

So why doesn’t the FED just lower interest rates?

The Federal Reserve manages the economy primarily through interest-rate policy. Its mandate is to balance supporting full employment while controlling inflation. Strong employment, along with other factors, can contribute to higher inflation. The Fed’s inflation target is 2%; the current inflation rate stands at 4.2%.  Wholesale inflation hit 6.5%.  Producers will soon have to pass along those inflationary increases, including those caused by tariffs.

Many of us have been hoping for lower interest rates. However, several factors are now putting upward pressure on inflation. One major factor is energy cost. The conflict in the Middle East created inflationary pressures worldwide, paricularly energy and fertilizer costs. Add the ongoing effects of tariffs, and inflationary pressures become even stronger.

Although the Fed now has a new Chairman appointed by President Trump, who would like to see rates lowered, , the Federal Reserve may actually be moving toward raising interest rates rather than lowering them.

The Chair of the Federal Reserve does not unilaterally determine Fed policy; decisions are made collectively. The Federal Open Market Committee (FOMC), the Fed’s primary monetary policymaking body, consists of 12 voting members, including both permanent and rotating seats. Policy decisions are made by the committee as a whole.  The chair announces their decision.

Although we think the FED can do whatever they want with interest rates, there is an even bigger force we must contend with: the money supply and the entire universe of borrowing and lending money.

(The thoughts below are mine and mine alone. I try to avoid viewing economic events through a political lens, although politics and economics are often closely intertwined.)

 

A SHORT COURSE IN ECONOMICS

This year, we celebrate the 250th anniversary of the founding of our nation in 1776.

Another event of great significance also occurred in 1776.

That year, Adam Smith published his landmark work, The Wealth of Nations.  Modern Economics is 250 years old, and is often described as the law of supply and demand.

Often referred to as the Father of Economics, Smith explained the concept of supply and demand as an “invisible hand” that naturally guides the economy. According to Smith, the invisible hand is the automatic pricing and distribution mechanism in the economy. Smith described a society in which bakers and butchers provide products that individuals need and want, creating an economy that benefits everyone.  Supply and Demand are inexorably connected to price.

Smith’s ideas haven’t gone without critique since their first publication. Over time, his ideas have been expanded to reflect changing times and to include concepts such as marginal utility, comparative advantage, entrepreneurship, the time-preference theory of interest, and monetary theory.

This law works not only for commodities, but also for the money supply itself.  (In this analysis, prices are defined as interest rates.)

  • Monetary theory argues that shifts in the money supply significantly impact economic activity levels.
  • Critics caution that increasing the money supply can also lead to inflation and devalue savings if not managed properly.
  • Monetary Policy by the FED affects money supply, but so does Fiscal Policy by the government, through balanced and unbalanced budgets.
  • Unbalanced budgets result in Deficit Spending adding to the National Debt.
  • Fiscal policy and monetary theory often need to work together to ensure economic stability, especially during economic downturns.

I frequently write about how Federal Reserve decisions affect mortgage rates and homeownership. Monetary theory guides the Federal Reserve—particularly the Federal Open Market Committee—in making decisions regarding interest-rate policy.  They try to achieve a balance between full employment and controlled inflation.

The Federal Reserve announces its outlook and any changes to the Federal Funds Rate eight times each year, and every announcement is closely watched. This process is known as setting monetary policy. The Fed uses interest rates as one tool to balance its dual mandate of maximizing employment while controlling inflation.

The Federal Reserve has three primary monetary policy tools: open market operations, the discount rate, and reserve requirements. The Board of Governors oversees the discount rate and reserve requirements, while the Federal Open Market Committee directs open market operations. Together, these tools influence the money supply.

For many months, we have prayed the Federal Reserve would lower interest rates, which would reduce mortgage costs and improve housing affordability. Why doesn’t the Fed simply lower rates and make homes easier to buy?

One reason is that lower rates could fuel higher inflation, making everything—including housing—more expensive.

A second reason is that the Federal Reserve does not fully control interest rates. Treasury borrowing and fiscal policy also influence the supply and demand for money.

Another part of the government, the U.S. Treasury, borrows money through the issuance of Treasury Bills, Notes, and Bonds to finance government operations. As existing debt matures, new securities are issued to replace it. If tax revenues exceed expenditures, the Treasury can reduce borrowing and lower outstanding debt. If spending exceeds revenues, additional borrowing is required.  This total debt is called the US Deficit or the National Debt  This process is part of Fiscal Policy, which involves balancing taxation and government spending.

The Law of Supply and Demand governs interest rates just as it governs commodity prices.  The money supply itself is a commodity and responds to the law of supply and demand.

If the Treasury needs to borrow more money, that demand raises the cost of borrowing because it has to compete with other borrowers in the world marketplace.  While the FED would like to lower rates without causing inflation, but current Treasury borrowing is both raising interest rates and contributing to inflationary pressure because it is spending more than it takes in, and it needs to borrow to fill the gap.  That extra demand places extra upward pressure on interest rates and supports inflation.

The Economic Times published a recent ARTICLE that explained Treasury borrowings are on their way to adding TWO TRILLION DOLLARS to the US Deficit in Fiscal Year 2026 and again in Fiscal Year 2027.  As of now, the National Debt is $39 Trillion.  Very few calculators have that many digits available for calculations.  That much borrowing pressures interest rates to rise.

On to the second part of this report–PITI.

There are times when both the buyer and seller agree to close escrow with the seller remaining in the house for a short period.  They usually pay rent to the new owner, the buyer.  The minimum payment is generally referred to as PITI — Principal, Interest, Taxes, and Insurance.

We might call this the minimum monthly carrying cost of homeownership.  It is the monthly amount that people feel they can afford to buy and own a house.  PITI also limits how much credit a bank will give them.

How does PITI affect the ability of new buyers to afford homes in today’s market?

PRINCIPAL is repaid over the course of the loan.  If purchase prices increase, the amount borrowed, the principal usually increases.  For mortgages, Principal is usually the purchased price less the down payment, a fixed amount.

INTEREST is the additional monthly amount charged by the lender, a cost for borrowing the Principal.

A fixed monthly payment includes both a partial repayment of the principal and an interest charge.  The principal is paid off in very small amounts at first, but in larger and larger amounts as the loan approaches the final payoff.  The reverse is true of interest.  For the preferred 30-year mortgage, the monthly payment for both pricipal and interest is a fixed amount over all 30 years of the loan.  Those two amounts together define P and I.

TAX is the third cost contributor to monthly payments.  Thanks to Proposition 13, property taxes are regulated.

Proposition 13 fixed three specific problems. First, it capped the base property tax rate at 1% of the assessed value, generally the sales price, at the time of purchase. Second, it limited annual assessment increases to 2%, regardless of how fast the market moves. Third, it required a two-thirds supermajority vote of the legislature for any new state taxes. For homeowners, this means your tax bill is predictable from the day you close escrow, with annual increases limited to 2%.

The final base cost is INSURANCE.   Banks require insurance on the property being used as collateral for the loan.  That cost used to be a relatively small and stable portion of the monthly payment, but that has changed dramatically.  Not only is insurance now difficult to obtain and very costly, but rising insurance costs have made it a significant factor in ownership costs.  Many insurance companies have more than doubled homeownership insurance costs.  Condominium insurance costs are even higher.  Availability has led many to rely on the Fair Plan, an expensive, minimal-coverage insurance option.   Even the FAIR PLAN just announced a 29% increase effective October 15, 2026.

Buyers have regular monthly income that can be used to buy a home, using that home as collateral for the loan.  That monthly income is used to pay Principal and Interest, Taxes, and Insurance.  If any one of these increases more than expected, the homeowner must cut back on other payments or borrow less funds.  Taxes are a certainty and are controlled by Prop 13, but they do increase by 2% a year.  If Insurance costs rise, there is less money available to pay interest and principal.  However, the outlook for lower interest rates is doubtful given our current Fiscal Policy.  The only thing left is to lower the loan amount, which lowers the amount of home the buyer can afford  to purchase.

One of the benefits of being a homeowner is the relative stability of PITI.  Principal and Interest are locked in at the inception of the loan, and taxes are limited to a 2% annual increase.  However, insurance has become a wild card against stability and affordability.

This helps explain why sales numbers have been lower than historical averages and why home prices are hitting a plateau.  Interest rates are high and are likely going higher. The FED can only do so much with Monetary Policy; the government has to modify Fiscal Policy and reduce deficit spending to control the growth of the National Debt.  

OK, that was a lot.  Thanks for working through it.  Let’s look at the charts and history and see if they agree with the information above.

 

THE STATISTICS FOR OUR LOCAL REAL ESTATE MARKET

First, the tables.  Compared to last year, inventory is down just 2%, but prices are also down: median prices are down 3%, and average prices are down 1%.  Properties are spending roughly the same amount of time on the MLS, four weeks.  With inventory and sales about the same as last year,  inventory currently represents a little over 10 weeks’ worth of sales.  Conejo is a relatively higher-priced market, with 38% of all active listings currenlty priced over $1.5 million.  Although the same total number of homes were sold this year compared to last year, the price categories of sold properties at the bottom of the table have major variances.  Properties under $750,000 are up 12%, properties priced between $750,000 and $1 million are down 12%, properties between $1 million and $1.5 million are up 9%, and properties priced in excess of $1.5 million are down 7%.

For Simi Valley and Moorpark, the story is a little different.  Simi/Moorpark is a relatively affordably priced  market, with prices about equal to the California State median sales price.   Inventory was down 10%, due to the good news that sales were up 14%.    Median prices were up 1% compared to last year, while average prices were down 9%, due to a mix of more lower-priced homes and fewer higher-priced homes.  Like Conejo, homes are on the market for about 4 weeks, and inventory currently represents a little over 9 weeks’ worth of sales.  Sales have skyrocketed, up 14%, and the bottom half of the chart shows where the increases were, primarily in the $1 million to $1.5 million tranche.

Let’s dive deeper into the individual charts.  Conejo inventory is following the path of 2025, nearly double the averages in 2023 and 2024.  A big year-to-year change was the increase in the under-$750,000 inventory, which rose significantly from last year.

Simi/Moorpark also showed major gains in the under-$750,000 inventory.  It would have been larger, but 14% stronger sales have removed some of the inventory, which is the best way to reduce inventorys

Sales for Conejo hit a high last month but have now dropped back to the average for the past three years, about 2/3 of the 4-year average for “normal” years.

Simi/Moopark sales, while strong, are well within the envelope of sales for the past three years.

Comparing the two valleys, with sales accumulating as the year progresses, shows slight increases over the past three years.

SImi/Moorpark shows the same small increase.

Conejo prices are experiencing the usual seasonal increases before the end of summer.  However, prices have not increased significantly over the past four years, as is evident in the Median price graph.

Simi/Moorpark experienced a major jump in high-priced homes, as evidenced by the Average line on the graph, but has since dropped off.

 

What of the future?

Our economy runs on consumer spending, and consumers’ attitudes about the future have a massive influence.  As noted in previous issues of this report, consumers are not optimistic about the future.

Consumer Sentiment Drops to New Low, according to the University of Michigan.  The survey’s headline index declined to 44.8 this month, from April’s 49.8, per results recently published. The April reading was itself the lowest final number ever recorded to that point.

Home price growth will be limited by a move to higher interest rates, with buyers also limited by the amount they can spend to buy a home due to the increased insurance component of their monthly payment.

Add a cloud due to uncertainty, and home sales and home prices will show little growth.

Interest rates—no reductions in sight.  Unfortunately, rates will increase.  That knowledge may convince your clients to buy now and lock in their mortgages.

Insurance is more important than ever, with no reductions in the foreseeable future.  Only one thing will change insurance costs—experience.  Improving home resiliency against wildfires will eventually result in improved experience and reduced rates.  But that will not happen quickly.

I have been trying to find some sunlight in my crystal ball, but I also want to be honest about what is happening.

The good news is that we are very stable.

Join me in praying for a final end to the war.  The world needs it to end.  Short term, that is the best thing that could happen for our market, recreating stability.

Stay safe out there, and keep providing valuable information to your clients.  You are the real estate expert in their area, make sure you stay in touch.

Chuck