SF Bay Market Insights - January

As 2025 came to a close, the U.S. economy delivered a mix of encouraging signals and cautionary notes—setting the stage for what could be another dynamic year ahead. From consumer spending patterns and a cooling labor market to renewed policy debates around housing affordability, the outlook for 2026 is anything but dull. For buyers, sellers, and investors alike, understanding these trends will be key.

Holiday Spending Holds Up—for Now

U.S. consumers showed resilience through the 2025 holiday season, with retail spending rising modestly despite ongoing economic uncertainty. According to Visa, holiday retail spending increased 4.2% year-over-year, driven largely by strong ecommerce growth of 7.8%, while in-store sales rose 3%. Traditional brick-and-mortar purchases still dominated, accounting for 73% of total retail payment volume.

Electronics led all categories with 5.8% growth, followed closely by apparel and accessories at 5.3%. Home-related categories, however, lagged behind, furniture and home furnishings inched up just 0.8%, while building materials and garden equipment declined 1% compared to 2024.

One concern moving into 2026 is how this spending was financed. Increased reliance on credit cards and buy-now-pay-later options suggests consumer debt levels may rise, potentially leading to a pullback in spending early this year something that could ripple into housing demand.

Labor Market: Cooling, But Still Standing

The labor market ended 2025 on a softer note. Nonfarm payrolls increased by just 50,000 jobs in December, below expectations and revised down from prior months. In fact, the three-month average of job creation turned negative, highlighting a clear slowdown.

For the full year, 2025 marked the weakest hiring environment since 2020, with only 584,000 jobs added, a sharp contrast to the more than 2 million jobs created in each of the previous two years. Job gains were concentrated in restaurants and bars, healthcare, and social assistance, while retail trade shed jobs.

There was some good news: unemployment dipped slightly to 4.4%, and average hourly earnings rose 3.8% year-over-year, exceeding expectations. Overall, the labor market appears to be cooling gradually rather than collapsing, an important distinction for housing stability.

Mortgage Rates React to Proposed GSE Intervention

Housing affordability returned to the spotlight as President Trump announced plans to direct Fannie Mae and Freddie Mac to purchase up to $200 billion in mortgage-backed securities, with the goal of lowering mortgage rates.

Markets responded quickly. The average 30-year fixed mortgage rate fell to around 6%, its lowest level since early 2023. While some of the initial drop may prove temporary, given the $11 trillion size of the overall MBS market—even modest rate relief could make a meaningful difference for buyers struggling with affordability, particularly in high-cost California markets.

Debate Over Institutional Buyers and Single-Family Homes

Another headline-grabbing proposal involved a potential ban on large institutional investors purchasing single-family homes. While details remain limited, the announcement reignited debate about affordability and competition for first-time buyers.

The National Association of REALTORS® (NAR) welcomed the focus on affordability but emphasized that institutional investors represent a relatively small share of the market. Instead, NAR advocates for policies that expand housing supply and encourage institutions to sell homes to owner-occupants—solutions aimed at strengthening communities rather than simply restricting demand.

Consumer Sentiment: Job Anxiety, Financial Optimism

Recent data from the New York Fed’s Survey of Consumer Expectations paints a nuanced picture of consumer confidence. While Americans are feeling more pessimistic about their job prospects with the perceived probability of job loss rising to 15.2%, the highest since April they are simultaneously feeling better about their personal finances.

Fewer respondents reported being worse off financially than a year ago, and optimism about future financial conditions increased notably. Rising stock market indices and a more pronounced K-shaped economy may explain this divergence, as households with assets feel more secure even as job uncertainty grows.

What This Means for Real Estate in 2026

As we move further into 2026, the economy continues to send mixed signals. Slower job growth and rising consumer debt may temper demand, while even slight improvements in mortgage rates could unlock opportunities for motivated buyers and sellers. Policy discussions around affordability and supply will remain front and center, especially in competitive California markets.

One thing is clear: adaptability and informed decision-making will be essential. Buckle up! 2026 is shaping up to be another interesting ride.