February 16, 2026 – Macroeconomic indicators suggest that the economy is stabilizing, a condition that would allow the Federal Reserve to put things on hold for now but may still cut rates later this year if it is necessary. With January job growth exceeding expectations and inflation surprising on the upside at the start of 2026, the economy is holding up better than previously thought. The Fed will likely remain patient and may not reduce its policy rate in the coming FOMC meetings in March and April. Flat retail sales and a reverse in small business optimism, however, provide a cautionary note that shows the economy is not out of the wood. A rate cut could still take place in the second half of 2026 if signs of distress are detected. The market has reacted positively after digesting the latest news, with the average 30-year fixed mortgage rate declining to its 3-year low last Friday. This is good news for the housing market, as the dip in rates will help further the improvement in affordability that we have seen in the last couple quarters.

California housing affordability improves from third-quarter 2025 and a year ago: Housing affordability in California improved from both the previous quarter and the same quarter of last year. The statewide Housing Affordability Index (HAI) for existing single-family homes inched up one percentage point (ppt) from Q3 2025 to 18% in Q4 2025 and rose two ppts from its year-ago level. While the statewide median home price moderated in Q4 as market competition cooled and seasonal factors kicked in, borrowing costs remained elevated by historical standards but continued to ease and reached the lowest level in nearly two years. The monthly mortgage payment for a median-priced home—including taxes and insurance—slipped 4.7% from the prior quarter and dipped 4.0% from a year earlier, as the effective mortgage rate declined on both quarter-to-quarter and year-over-year bases.

Inflation slows at the start of 2026: The latest consumer price index (CPI) came in lower than expected with core CPI reaching the lowest in nearly six years. The January headline CPI increased 0.2% from the prior month and climbed 2.4% from the same month last year, with both growth rates pacing lower than economists’ expectations. Core CPI dropped to 2.5% year-over-year and recorded the best reading since March 2021. The slowdown in inflation was due partly to a drop in gasoline prices and a decline in used car prices. Shelter cost, a category that accounts for more than one-third of the CPI weighing, was still up 3.0% on an annual basis but improved from the 3.2% gain recorded in December 2025. Grocery prices moderated on a year-over-year basis in January, but restaurant meals price growth remained high last month. Despite seeing an encouraging start to the year, prices on computers, appliances, and hospital care remained elevated and continued to weigh on Americans. The Fed will likely keep the fed funds rate unchanged in March and April but may make a move -or two- before the end of the year. 

Solid jobs growth in January likely put the Fed on hold: The U.S. labor market kicked off 2026 with a strong note, with nonfarm payrolls rising a seasonally adjusted 130k in January, the largest increase observed in the past 13 months. The unemployment rate also fell to 4.3%, the lowest level since August 2025. Most of the jobs gained last month were in health care (82k), social assistance (42k), and construction (33k). With hiring concentrated in a handful of industries and the latest downward revisions showed the economy added a much smaller number of jobs in 2025, the health of the labor market remains a concern. Nevertheless, the rebound in job growth is still encouraging and offers hope that general employment conditions are stabilizing. Meanwhile, average hourly earnings increased 3.7% from the same month last year and average weekly earnings jumped 4.3% on an annual basis, which is an indication that suggests steady wage growth is keeping up with the increase in consumer prices at the aggregated level. With the latest report showing signs of stabilization in the labor market, the Fed has more reasons to push for no changes in rate in the upcoming meeting in March.

Small business optimism moderates but remains above its 52-year average: The NFIB Small Business Optimism Index dipped in January after climbing two consecutive months but continued to stay above its 52-year average of 98. More respondents reported that the overall business health improved in January, with the net percent of owners expecting higher real sales volume in the next quarter jumping 6 points (pts) from December. The Uncertainty Index, on the other hand, completely erased the improvement made in December and rose 7 pts last month. Those who raised their average selling prices in January were down 4 pts from the prior month, but the net percent of owners who plan to increase prices in the next three months climbed 4 pts from December, which could be an indication that upward inflationary pressure could linger on in the months ahead. The cost or availability of insurance has become a bigger issue for small business owners, as the share who reported it as their single most important problem increased by 4 pts in January and reached the highest level since December 2018.    

Retail sales flatline to end 2025: Sales at the U.S. retailers and restaurants were flat in December compared to the prior month, as rough weather and pull-forward sales negatively affect retail spending. The headline retail sales figure recorded a 0% change month-over-month in December and registered a year-over-year gain of 2.4% from 12 months ago. The annual growth rate for the non-inflation adjusted retail sales figure was the smallest since September 2024 and is much smaller when inflation is accounted for. Sales declines for vehicles, furniture, and electronics were offset by growth in building materials, dining-out and gasoline. With retailers advertising aggressively and offering discounts in October and November, sales might have been pulled forward prior to the last month of the year. Unfavorable weather conditions likely played a role as well in the dip in consumer demand in December.

Note: This summary report gets updated every Monday by 6:00 pm PST. Feel free to email us at [email protected] if you have any questions and/or feedback.

Download This Week's Write-Up

Weekly MLS Market Data Report

Quarterly Member Sentiment Report 
(Survey discontinued as of 2026)