What’s the Latest?

As we move ahead further into 2026, the national housing market exhibits signs of stabilization: inventory levels are increasing (though remaining below pre-pandemic averages), buyers are achieving purchases below asking prices, and the mortgage rate lock-in effect is gradually diminishing. However, with a new Federal Reserve chair and ongoing AI-related developments, potential volatility remains. Locally in Monterey, demand for premium properties continues to hold firm amid broader challenges in California. Skip to the second part of the newsletter for an update on the local market.

Federal Reserve's New Direction: Chair Kevin Warsh

President Trump has nominated Kevin Warsh as the next Federal Reserve chair, bringing a hawkish perspective with certain qualifications:

• Potential rate reductions: Warsh has expressed support for lowering interest rates to promote economic growth and reduce borrowing costs. However, his historical emphasis on combating inflation indicates a cautious, data-dependent approach rather than aggressive easing.

• Quantitative tightening considerations: He advocates resuming quantitative tightening (QT), reducing liquidity, and selling Treasuries while redirecting focus from Wall Street to Main Street, actions that could influence bond and equity markets. Senate confirmation proceedings may moderate these positions so don't be surprised if we continue QE/money printing.

• Fiscal discipline: Warsh has described excessive government spending as a primary threat to economic stability, calling for reductions, tax increases, or entitlement reforms to address deficits and prevent overlap between monetary and fiscal policy.

• Perspective: Should policy shift toward continued monetary accommodation (likely due to the ongoing debt environment), real estate may benefit in the short term through rising prices. However, associated increases in costs such as insurance and taxes could further challenge affordability for many households. Hard assets may perform well; a market crash appears unlikely.

National Housing Trends: Increasing Buyer Leverage

• Price negotiations: In 2025, 62% of buyers purchased homes below the original listing price, the highest proportion since 2019, with an average reduction of 8%, the largest since 2012. Opportunities for negotiation continue to expand.

• Inventory growth: Active listings increased 12.1% year-over-year in December 2025, though seasonal declines brought totals below 1 million homes, still 12.5% below 2017–2019 levels. Year-over-year growth has moderated for seven consecutive months.

• State-level variations: Seventeen states now exceed 2019 inventory levels; California remains approximately 3% below.

• Diminishing lock-in effect: Mortgages at 6% or higher now comprise 21.2% of outstanding loans, the highest share since 2015, potentially encouraging more sellers and increasing supply as rates align closer to current market conditions.

• Absence of prior bubble dynamics: Unlike the 2006 era of heavy equity borrowing, negative equity remains uncommon. Mortgage debt stands at 43.9% of GDP (down from a peak of 73.1%), and 40% of homes are mortgage-free (up from 33% in 2010). Real home prices are 2.4% below the 2022 peak.

• Home-flipping returns: Profits have declined to a 23.1% ROI, the lowest since 2008, due to elevated costs.

• 2026 inventory projections: Forecasts indicate a 9-11% increase in active listings (to approximately 1.18 million homes), according to Bright MLS, Compass, and Realtor.com, potentially moderating prices and enhancing affordability.

• Alternative perspective on rates: Housing challenges primarily arise from elevated prices rather than interest rates; Federal Reserve bond purchases could further stimulate demand and contribute to higher values.

• Trade deficit reduction: The deficit narrowed 39% to $29.4 billion (lowest since 2009), supporting GDP and reducing foreign debt reliance, though influenced by factors such as tariffs and potential demand softening.

• Proposed institutional buyer restrictions: Plans to limit large investors in single-family homes (representing only 2.5% of purchases) address concerns but do not resolve underlying supply constraints.

California Overview: Challenges and Opportunities

• Business and resident departures: In 2025, companies including Chevron, Tesla, SpaceX, X, Oracle, Realtor.com, John Paul Mitchell Systems, In-N-Out Burger, and LandSea Homes relocated (primarily to Texas and Tennessee), citing high taxes, regulations, costs, homelessness, and safety issues. Prominent individuals have followed. Projections indicate potential worsening in 2026 due to proposed wealth tax measures, with economic impacts including a $50-70 billion state deficit and continued population outflows.

• San Francisco market activity: The area shows renewed interest, driven by anticipated IPOs such as OpenAI and SpaceX, improving affordability for equity-wealthy buyers. Keep in mind the SF/Silicon Valley area is our largest feeder market, and our market historically tails that local market by 6-12 months, so we could see increased buyer activity locally from wealthy Bay Area buyers in 2026 as a result of a record IPO year.

Broader Developments: AI, Wealth, and Outlook

• AI-related employment shifts: 2025 featured substantial reductions (e.g., U.S. government ~307,000, UPS ~78,000, Amazon ~30,000, Intel ~25,000), attributed partly to AI adoption alongside factors such as overhiring and cost pressures. Comparable to the Industrial Revolution's initial disruptions, AI may initially displace roles but ultimately generate opportunities in technology, healthcare, energy, and operations.

• Ultra-luxury sales: All top 10 U.S. residential transactions in 2025 exceeded $100 million, reflecting strong equity market performance and concentrated wealth growth.