Economic Update for The Year Ending December 31, 2022

High inflation led to higher interest rates in 2022 - As inflation spiked to levels not seen since the 1980s, interest rates rose to their highest levels in over a decade. Both mortgage rates and short-term rates doubled in 2022.?

Inflation, while still rising at the highest levels in forty years, seems to be moderating?-The November?Consumer Price Index?reading showed that prices were?7.1% higher year-over-year. That was the lowest level of the year. CPI, the broadest measure of inflation, peaked at 9.2% in June and has worked its way down steadily. It is still a long way off the Federal Reserve's target of 2%.?

Stock markets had a turbulent year?- Higher interest rates increase borrowing costs, which cut profits. In 2022, despite higher borrowing costs, yields remained strong as consumers kept spending at record levels. The Fed is intent on slowing the economy to slow the pace of consumer spending and hiring to curb inflation. Investors fear the Fed may go too far with their interest rate hikes and other tightening measures and cause a recession in 2023. Recession fears caused stock markets, which have risen steadily since the Great Recession a decade ago, to drop. Other sectors, especially technology, were overvalued and fell sharply. Other issues were that technology has advanced to a point where unique companies now have many competitors that offer similar products and features. The tech-heavy NASDAQ, which increased at the highest percentage rates in precious years, dropped 33% in 2022.?

In contrast, The Dow, consisting of more traditional and established companies, dropped just 9%.?The Dow Jones Industrial Average ended the year at 33,147.25, down 8.8%?from 36,338.30 on December 31, 2021. It was 30,606.48 at the close of 2020.?The S&P 500 closed the year at 3,839.50, down 19.5%?from 4,766.18 on December 31, 2021. It was 3,756.07 at the end of 2020.?The NASDAQ closed at 10,466.48, down 33.1%?from 15,644.97 at the end of 2021. It was 12,888.28 on December 31, 2020.?

U.S. Treasury Bond Yields rise 2022 - The 10-year U.S. treasury bond yield?closed the year at 3.88%, up from 1.52% On December 31, 2021.?The 30-year treasury yield?ended the year at 3.97%,?up?from 1.90% on December 31, 2021. We watch bond yields because mortgage rates often follow treasury bond yields.?

Mortgage Rates spiked in 2022?- December 29, 2022;?Freddie Mac Primary Mortgage Surveyreported that the?30-year fixed rate mortgage average was 6.42%, up?from 3.11% on December 28, 2021.?The 15-year fixed was 5.68%, up?from 2.33% last December. The 30-year was above 7% in October and is off its highs. Mortgage rates are long-term and follow projected inflation. If the CPI continues to drop, long-term interest rates will as well. We expect the 30-year to be in the mid to high 5% range by mid-2023 and back in the mid to high 4% range in 2024. We don't think we will see 3% again in our lifetime.?

2022 marked a year of labor shortages and higher wages?- The?unemployment rate?fluctuated between 3.7% and 3.5%, a 60-year low. The Labor Department's latest report showed that average hourly wages increased 5.1% year-over-year. The hectic pace of hiring has shocked investors and experts who felt that the most aggressive Fed action and interest rate hikes in forty years would have cooled an overheated jobs market by now. There are still about 1.75 open jobs for every worker looking for work. With more demand for workers than the number of available workers, wages will keep rising. The Federal Reserve has stated that they intend to keep increasing rates until the overheated jobs market cools to combat inflation. Consumer spending makes up about 70% of the U.S. economy. With higher salaries and ample jobs for anyone looking for a job, there is no reason to believe consumers will curb their spending.?

2022 Real Estate Market Update?- The 2022 real estate market was unlike any other. The first half of the year was the hottest real estate market of our lifetime. It was not unusual to see homes sell with multiple offers at hundreds of thousands or even millions over the asking price. Low inventory and low-interest rates had buyers in a frenzy. After losing out on several homes, buyers would pay anything, remove all contingencies and even release funds to be the successful bidder.?

Prices surged 10% - 15% in the first five months of 2022. We were all amazed at the prices we saw. As mortgage rates surged, affordability dropped, and the market stalled. It was like a switch got flipped. Buyers who would pay anything in May got price-conscious overnight. By November, year-over-year home prices were the same as last November, about 10%-15% below their crazy levels peak in May. Considering that prices have risen steadily since 2012, that's not bad! Prices have stabilized, and inventory levels are low.?

The number of new listings and sales in the last six months is the fewest we have seen in decades. This is because about 60% of all home sales are people who need to sell to buy. Selling a home with a 3% mortgage rate to buy a home with a 6% mortgage rate has caused many people to put off their move. That's why the number of homes sold was down 47% in November from last November. With lower prices, more time to decide, and a few crazy overbids, it is a great time to buy a home. Interest rates have dropped from their peak in October, and people are getting comfortable with these higher rates. We expect sales to increase in 2023 from the historically low numbers of about 270,000 homes on an annualized basis that we have seen over the past few months. We don't expect the number of sales to get anywhere close to the benchmark level of 400,000 a year in 2023.?

Home sales data is released for the previous month's third week of the month. These are November's home sales results.?

U.S. existing-home sales - The National Association of Realtors?reported that?existing-home sales totaled 4.09 million units?on a seasonally adjusted annualized rate in?November, down 7.7%?month-over-month from the annualized number of sales in October.?Year-over-year?sales were?down 35.4%?from an annualized rate of 6.33 million in November 2021. The?median price?for a home in the U.S. in November was?$370,700, up 3.5%?from $358,200 one year ago. November marked a record 129 consecutive months of year-over-year increases in the median price. There was a?3.3-month supply of homes for sale?in November, up from a 2.1-month supply last November.?First-time buyers accounted?for?28%?of all sales.?Investors and second-homepurchases accounted for?16%?of all sales.?All-cash?purchases accounted for?26%?of all sales.?Foreclosure and short sales?accounted for?2%?of all sales.?

California existing-home sales - The California Association of Realtors?reported that existing-home sales?totaled 237,740, on a seasonally adjusted annualized basis?in November, down 13.2% month-over-month from October, and down 47.7%?year-over-year?from November 2021, when 454,450 homes sold on an annualized basis. The statewide?median price?paid for a home in November was?$777,500, down 3% from $801,190 in October and 0.6% from $782,480 in November 2021. There was a?3.3-month supply of homes for sale in November, up from a 1.5-month supply one year ago.?

The graph below shows sales data by county in Southern California.?

Economic update for the week ending?

December 31, 2022

The Dow Jones Industrial Average closed the week at 33,147.25, down 0.2% from?33,203.93 last week.?The S&P 500 closed the week at 3,839.50, down 0.1%?from 3,844.82 last week.?The NASDAQ closed the week at 10,466.48, down 0.3%?from 10,497.87 last week.?

U.S. Treasury bond yields - The 10-year treasury bond closed the week yielding 3.88%, upfrom 3.75% last week.?The 30-year treasury bond yield ended the week at 3.97%, up?from 3.82% last week.?

Mortgage rates?- The?Freddie Mac Primary Mortgage Survey?reported that mortgage rates for the most popular loan products as of December 29, 2022, were as follows:?The 30-year fixed mortgage rate was 6.42%, up?from 6.27% last week.?The 15-year fixed was 5.68%, unchangedfrom 5.69% last week.

Wishing you a Happy, Healthy, and Prosperous 2023!