Economic update for the week ending September 17, 2022

Stock markets dropped sharply on higher than expected inflation report?- Stock markets had advanced in recent weeks as analysts felt inflation was moderating. Much of that hope was based on energy costs which have dropped about 40% from their highs in June. The August CPI report revealed that consumers used their savings at the pump to buy other goods. Rather than cooling as expected, consumer prices increased 0.1% month-over-month in August, and core inflation which excludes food and energy jumped 0.6% in August. Heated inflation means higher interest rates. In the hours following the release of the CPI report the Dow dropped over 1,100 points marking its 7th largest one-day drop ever. The S&P and NASDAQ had their 4th worst day ever. Bond yields and mortgage rates also jumped this week. Home mortgage rates are now at a 14-year high. All eyes are on the Federal Reserve which will increase its key interest rates next week. A 3/4% increase is pretty much built into stock prices, mortgage, and bond rates. Some experts feel the Fed may do a full 1% increase.?The Dow Jones Industrial Average closed the week at 30,822.42, down 4%?from?32,151.71 last week. It is down 14.2% year-to-date.??The S&P 500 closed the week at 3,873.33, down 4.8%?from 4,067.36 last week. The S&P is down 18.7% year-to-date.?The NASDAQ closed the week at 11,448.40, down 5.5%?from 12,112.32 last week. It is down 26.8% year-to-date.?

U.S. Treasury bond yields - The 10-year treasury bond closed the week yielding 3.45%, up?from 3.33% last week.??The 30-year treasury bond yield ended the week at 3.52%, up?from 3.47% last week. We watch bond yields because mortgage rates often follow treasury bond yields.?

Mortgage rates?– The?Freddie Mac Primary Mortgage Survey?reported that mortgage rates as of September 15, 2022, for the most popular loan products were as follows:?The 30-year fixed mortgage rate was 6.02%, up?from 5.89% last week.?The 15-year fixed was 5.21%, up?from 5.16% last week.?The 5-year ARM was 4.93%, up?from 4.74% last week.?

California existing-home sales?-?The California Association of Realtors?reported that?existing-home sales totaled 313,540?on a seasonally adjusted annualized basis?in August,?down?24.4%?from August 2021 when 414,860 homes sold on an annualized basis.?Pending sales jumped 16.6%?month-over-month in August so there will be more closings in September.?Year-to-date?existing-home sales are?down 14.9%.?The statewide?median price?paid for a home in August was?$839,460,?up 1.4% from $827,940 in August 2021.?There was a?2.9-month supply of homes for sale in August, down from a?3.2-month supply of homes?for sale in July and?up from a 1.9-month supply one year ago.?

My take - We are no longer seeing homes with dozens of offers and the successful bidder paying tens of thousands or hundreds of thousands of dollars over the list price. Those overbid sales we saw from February to May that shocked everyone are no longer common. If you look at the crazy overbid sales it looks like homes are selling for about 10% less than the overbid price. Homes are selling for about the same as they were at the beginning of the year and for about the same price that was expected before the shocking overbid offer came in.?There is no way to time the top of the market until it’s too late. Those overbid sales should be considered outliers. If you exclude them from your comparable sales and look at the sales from late 2021 and January 2022 you will get a good indication of value. I expect prices to be fairly stable from here due to low inventory. There are still plenty of buyers out there and not a lot of choices.?We are seeing more new escrows than we saw in June and July. Pending home sales have increased dramatically. The number of new contracts to purchase an existing-homes jumped 16.6% in August from the number of homes that went under contract in July. Buyers are feeling more confident and are becoming more comfortable with higher mortgage rates.?Homes are selling.?It’s not bad to get the second or third highest price ever in your neighborhood! Unfortunately, the highest price ever is behind us.?

Below is existing-home sales data from Southern California.

Have a great weekend!