Economic update for the month ending August 31, 2022

Stock markets dropped about 4% in August – To say that the markets don’t know what to do is an understatement. The first half of 2022 marked the worst first half of a year for the S&P 500 since 1939. The Dow and Nasdaq also had their worst half of a year since 1970. In July, inflation seemed to be moderating, corporate profits were higher than expected, consumer spending was strong and July marked the best July in 50 years for the major stock markets. They made up over half of the losses suffered in the first six months. In August markets reversed after the July jobs report. It shocked experts because employers had hired over double the number of new employees that analysts had estimated and the unemployment rate dropped to 3.5%, a 52-year low. Stocks began to rally again after the July CPI report was released in the second week of the month. It showed that consumer prices, a key indicator of inflation, rose 8.5% year-over-year in July, down from 9.1% in June. With inflation moderating investors felt that the Fed would be less aggressive with future interest rate hikes. On the third week of August, the Fed minutes from the July meeting were released. The minutes showed that the Fed did not intend to slow the pace of rate hikes and was concerned with the overheated jobs market and consumer spending which they have been trying to slow and stocks began to drop. On August 26 Federal Reserve Chairman, Jarome Powell gave a major policy speech. He said that the Fed intended to act “quickly and swiftly for a long prolong period of time” to get inflation down to the Fed target range of 2%. He said to “expect pain!” He cited the overheated jobs market, which is causing a labor shortage and leading to wage gains that are fueling inflation. He spoke about the rate of consumer spending. His frustration that all the rate hikes and other measures to slow the economy was not having an effect on the pace of hiring and spending was evident. Stock markets sold off in the hours that followed his speech. For example, the Dow dropped over 1,000 points. To put it in perspective, that was a 3% drop. The S&P dropped 3.4% and the Nasdaq dropped 3.9% on the 26th. It was a tough speech and a tough day! In September we will be looking at the jobs report which will be released tomorrow. If the pace of hiring continues to be brisk, we expect stocks to continue to drop. If hiring is strong but not above expectations stocks should stabilize. If the pace of hiring is weak and the unemployment rate begins to rise stocks should rise as well. We will look at the August CPI report the second week of the month to see what the inflation rate is. If it looks like inflation is continuing to moderate, so below 8.5%, stocks will do well, but if the CPI rate is higher stocks will get hit hard. On the third week of the month, the Fed will raise their key interest rates. A .75% rise is expected. I would not expect that rise to cause stocks to drop. It’s already built into the current market levels. Should they do a full 1% increase, that’s a different story, but it is not expected. The Dow Jones Industrial Average closed the month at 31,510.43, down 4.1% from 32,845.13 on June 30. It’s down 13.3% year-to-date. The S&P 500 closed the month at 3,955.29, down 4.2% from 4,130.29 last month. The S&P is down 17% year-to-date. The NASDAQ closed the month at 11,816.20, down 4.6% from 12,390.69 last month. It is down 24.4%, year-to-date.

U.S. Treasury bond yields – The 10-year treasury bond closed the month yielding 3.15%, up from 2.67% last month. The 30-year treasury bond yield ended the month at 3.27%, up from 3.00% last month. 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 1, 2022 for the most popular loan products were as follows: The 30-year fixed mortgage rate was 5.66%, up from 5.30% at the end of July. The 15-year fixed was 4.98% up from 4.58% last month. The 5-year ARM was 4.51% up from 4.29% last month. Rates topped out in the middle of June when the 30-year hit over 6%. It dropped to 4.99% the first week of August, but have worked their way back up over ½% since then. The jobs report and the CPI report will have a big impact on rates. If hiring slows and unemployment increases, rates will drop. If hiring remains strong rates will remain at these levels or rise slightly. If the CPI rate shows inflation is dropping, rates will drop. If the CPI increases mortgage rates will increase as well. These are long term rates. They are tied to longer term inflation expectations, not short term. When the Fed raises rates, it may actually lower mortgage rates.

The August jobs report will be released tomorrow. That will be a good indicator of whether the fed rate hikes are causing employers to slow the pace of hiring. So far that has not happened. With unemployment at a 52-year low and wages increasing due to a shortage of labor. The tight labor market is one of the conditions that is fueling inflation.

U.S. existing-home sales – The National Association of Realtors reported that existing-home sales totaled 4.81 million units on a seasonally adjusted annualized rate in July, down 5.9% month-over-month from the annualized number of sales in June. Year-over-year sales were down 20.2% from an annualized rate of 6.03 million in July 2021. The median price paid for a home in the U.S. in July was $403,800, up 10.8% from $364,600 one year ago. July marked a record 125 consecutive months of year-over-year increases in the median price. There was a 3.3-month supply of homes for sale in July, up from a 2.6-month supply last July. First-time buyers accounted for 29% of all sales. Investors and second-home purchases accounted for 15% of all sales. All-cash purchases accounted for 24% of all sales. Foreclosure and short-sales accounted for less than 1% of all sales, remaining at a historic low.

California existing-home sales – The number of single family homes sold in July declined 31% year-over-year – The California Association of Realtors reported that existing-home sales totaled 295,460 on a seasonally adjusted annualized rate in July, down 14.4% from June, and down 31.1% from July 2021 when 428,980 homes sold on an annualized basis. Year-to-date, California existing-home sales were down 13.6% in July. The statewide median price paid for a home in July was $833,910, up 2.8% from $811,170 in July 2021. There was a 3.2-month supply of homes for sale in July, up from a 1.9-month supply in July 2021. A normal market has a 5-6 month supply of homes on the market.

My take – We have been shocked by such a sudden slowing in the number of sales. The number of homes sold is a number that we have not seen in July since the financial crisis. From the closings I have seen, August may be even worse with fewer closings. Fortunately, I we have had a pick up in openings. I expect September sales to be higher than July and August. Prices are another story. The market got so crazy due to bidding wars in the first quarter of the year that we saw sales that shocked us. Many homes had dozens of offers. Most offers were at or a little over the asking price. One or two buyers went tens or even hundreds of thousands of dollars over the asking price. It seemed that people were so tired of losing out on homes that they would pay anything to get the one they were bidding on. We all scratched our heads in amazement with how much over full price the successful buyer was willing to pay. We are not seeing that now. We are seeing the market normalize. Prices are back to the level they began the year. If you look just at the highest price ever reached in March, April or May we are probably about 10% below that highest ever sale where the buyer bid tens or hundreds of thousands over full price to get it! We are not scratching our head in amazement with that panic buying when someone will pay anything now. Without those outlier overbids, the sales we see are the second or third highest price ever for a similar home in the neighborhood. That’s not so bad!

The graph below shows regional figures by county in Southern California.