Economic update for the week ending February 18, 2017

Stocks markets end week at record highs – Stocks surged again this week after reports of stronger retail sales and inflation showed that the U.S. economy was stronger than expected. Europe and Asia also have seen results showing their economies are growing. Their economies had been slowing the last couple of years, which had dragged our stocks down. Oil also has improved. It’s more than $53 a barrel, up from just $28 a barrel last February, a 20-year low. That also dragged down energy, oil, and mining stocks, which are showing strong gains again and economies in oil producing regions. For the week, markets gained 1.5%, which followed a 1% gain last week. The S&P is up over 5% this year. That’s just 45 days! The owner of Rodeo Realty said, “Since the election stock markets are up about 14%. That’s a huge gain. It’s largely based on expectations of a better economy, with higher corporate profits as a result of lower taxes, less regulation, and higher infrastructure and defense spending. While we all expect those things to improve the economy and profits, I find it hard to believe that it will give a big enough boost to sustain these huge stock gains. I’m sticking with Real Estate. I think we have a good way to go. Prices have had a good run, but compared to the highs of 2007, adjusted for even the pathetically low inflation we have had, considering the 10 years of wage growth, even if at such low levels, and that interest rates were around 6% in 2007, home affordability is much higher now.” The Dow Jones Industrial Average closed the week at 20,624.05, up from last week’s close of 20,296.27. The S&P 500 ended the week at 2,351.16, up from its close of 2,316.10 last week. The NASDAQ closed the week at 5,838.58, up from last week’s close of 5,734.13.

U.S. Treasury Bond yields stable this week – The 10-year U.S. Treasury Bond closed the week yielding 2.42%, unchanged from 2.41% last Friday. The 30-year Treasury Bond yield closed the week at 3.03%, almost unchanged from 3.01% last week. Mortgage rates follow bond yields, so we watch treasury bonds closely.

Mortgage rates hold steady – The Freddie Mac Primary Mortgage Survey released on February 16, 2017, reported that average mortgage rates from lenders surveyed for the most popular mortgage products were as follows: The 30-year fixed rate average was 4.15%. The 15-year fixed average rate was 3.35%. The 5/1 ARM average rate was 3.18%.

Economy shows signs of inflation picking up – The prices Americans pay for goods and services surged in January by the largest amount in four years, mostly reflecting a rebound in the cost of gasoline that’s taking a bigger chunk out of household incomes. The government’s reported consumer price index (CPI) showed that consumer prices rose 2.5 percent in January from a year earlier, the highest rate since March 2012. About 1/2 of the rise was attributed to higher gas prices. Rent and medical costs also saw a spike from a year earlier. The seasonally adjusted 0.6% rise in January was double the 0.3% economists predicted. Core inflation which strips out gasoline and food prices rose 0.3% in January and was up 2.3% from last January. We watch inflation because when inflation rises it causes interest rates to rise. Fortunately rates have risen on the expectation of higher inflation, so rates remained steady despite the higher CPI report.

California home closed escrows higher in January – The California Association of Realtors reported that home sales totaled 420,100 in January on a seasonally adjusted basis. The number of sales increased 2.1% from December’s sales pace and 4.4% from last January. Although the median price dropped slightly from December, it was up 4.8% from January 2016’s median. Inventory levels rose to a 3.7 month supply in January from a 2.7 month supply in December as more homeowners put their homes on the market. There was a 4.3 month supply last January.

Stay dry and have a great weekend!