Economic update for the week ending February 23, 2019
US stock markets are up more than 18% in nine weeks - Stock markets have made up nearly all the declines suffered in the last three months of 2018. Indexes are now approaching their all time highs reached last fall. Experts point to investor’s renewed confidence based on three key issues: One: Progress in the US - China trade negotiations. In the third quarter of 2018 it appeared an all out trade war was beginning. Both countries began experiencing slowing in the economy. In fact, China’s economy showed drops in economic output, not the US. Fears that their slowing economy would impact ours spooked investors here. A deal was made to pause any further tariffs until March to give the two countries time to make a deal. While no official deal has been finalized that deadline has been extended, because talks are proceeding positively. It appears that a deal will include provisions for China to encourage more purchasing of US goods with targets to close the tremendous trade imbalance between the countries. Two: Corporate earnings beat expectations. Analysts had expected corporate earnings to weaken in the fourth quarter because economies in Europe and Asia had slowed. That did not happen. Three: Investors had grown cautious that interest rate hikes by the Federal Reserve would slow the economy. Investors felt that the Fed had moved to quickly by hiking rates so many times over the last three years. Those fears added to a reason that the stock market began to collapse at the end of last year (December 2018 was the worst December stock market loss since the Great Depression). In reaction to that drop the Fed announced that they would pause further interest rate hikes. Minutes from their latest meeting released this week showed that members voted unanimously to leave rates unchanged, and that they were planning no hikes for 2019 if conditions remain unchanged. The Dow Jones Industrial Average closed the week at 26,031.81, up 0.6% from 25,883-25 last week. It’s up 11.6% year to date. The S&P 500 closed the week at 2,792.67, up 0.6% from 2,775.50 last week. It is up 11.4% year to date. The NASDAQ closed the week at 7,527.54, up 0.7% from 7,472.71 last week. The NASDAQ is up 13.4% year to date.
Treasury Bond Yields almost unchanged this week - The 10-year treasury bond closed the week yielding 2.65%, down slightly slightly from 2.66% last week. The 30-year treasury bond yield ended the week at 3.02% up slightly from 3.00% last week. We watch treasury bond yields because mortgage rates follow bond yields.
30-year mortgage rate at lowest level in one year - The February 21, 2019 Freddie Mac Primary Mortgage Survey reported that the 30-year fixed mortgage rate average was 4.35%, down from 4.37% last week. The 15-year fixed was 3.78%, down from 3.81% last week. The 5-year ARM was 3.84%, down from 3.88% last week.
January 2019 California existing home sales report - The California Association of Realtors released their data for January home sales. The number of sales dropped for the fourth straight month hitting the lowest level since April 2008. Closed escrows on existing homes dropped to 357,530 units on a seasonally adjusted annualized basis in January. That marked a 12.6% year over drop from 409,520 closings last January. This data is for closed escrows so we are talking about homes that went under contract between October and December. This was at the same time that the stock market dropped almost 20%. People were in a panic and that affected home purchases. Now that stocks have made back over 18% of those losses we see buyers returning to the market. Interest rates have also dropped to the lowest level in one year. We have seen a drastic improvement in the number of homes that have gone into escrow in the last two weeks. It’s like someone flipped a switch and homes are selling briskly again. Unfortunately, those homes won’t close escrow for 30-60 days so we won’t see the impact until March or April in the data. Those should be very positive reports when these sales begin to close. February’s home sales report will be another disappointing month because that is closings for homes that went under contract in December and January.
The median price paid for a home in California was $538,690, up 2.1% year over year from $527,780 last January. The median price is the point at which 1/2 the homes sell for more and 1/2 sell for less. While we look at how low the median price is compared to prices in out market it’s easy to assume that it has nothing to do with us, but over the 30 years that I have been following this data it’s amazing at how neighborhoods at all price levels follow similar percent increases and decreases as the median price percentages. It’s a reliable indicator of what is going on across all price levels. Unfortunately, the median price is compared year over year. Nobody looks at six months ago until now. The median price is 2.1% higher than last January. Prices spiked in April, May and June when inventory hit all time lows. Prices increases were approaching 10% year over year for the first time since 2014. That corrected from July to October and prices actually dropped before stabilizing again. The median price is about 8% below its peak in June, but higher than last January.
Interest rates have also fallen from their peak of 5% to about 4.3% making homes more affordable.
Inventory levels have risen for the 10th consecutive month after dropping for three straight years to historic lows. There was a 4.6 month supply of homes for sale in January, up from a 3.6 month supply in January 2018. There are more choices for buyers. We are seeing many buyers that couldn’t find a home last year and gave up returning to the market.
Economic update for the week ending February 16, 2019
Stock markets had another strong week - Stock markets surged again this week. The S&P which was down nearly 20% from its all time high in December is now just 6% below its all time high. It’s up 10.7% in just the first 6 weeks of the year. This week’s highlights: Investors were optimistic that a trade deal would be made soon ending the tariffs that have been put in place by both the US and China. President Trump said the March 1 deadline would be extended, leading investors to believe progress has been made. In fact, he said “it will be the best deal ever!” Another government shutdown was averted. Oil prices rose after Saudi Arabia agreed to cut output to reduce surplus oil levels which helped energy stocks. This all seemed to offset disappointing final December retail sales figures. The Dow Jones Industrial Average closed the week at 25,883.25 up 3.1% from 25,106.33 last week. It’s up 11.0% year to date. The S&P 500 closed the week at 2,775.50, up 2.5% from 2,707.88 last week. It is up 10.7% year to date. The NASDAQ closed the week at 7,472.41, up 2.4% from 7,298.20 last week. The NASDAQ is up 12.6% year to date.
Treasury Bond Yields almost unchanged this week - The 10-year treasury bond closed the week yielding 2.66%, up slightly from 2.63% last week. The 30-year treasury bond yield ended the week at 3.00%, up slightly from 2.97% last week. We watch treasury bond yields because mortgage rates follow bond yields.
Mortgage rates continue to drop - Rates are at the lowest levels since February 2018 - The February 14, 2019 Freddie Mac Primary Mortgage Survey reported that the 30-year fixed mortgage rate average was 4.37%, down from 4.41% last week. The 15-year fixed was 3.81%, down from 3.84% last week. The 5-year ARM was 3.88%, down from 3.91% last week.
Homes were more affordable in the fourth quarter of 2018 - The California Association of Realtors announced that their home affordability index rose in the fourth quarter of 2018 to 28%, up from 27% in the third quarter, but still less affordable than one year ago when the affordability index stood at 29%. Lower prices and higher wages offset higher interest rates in the fourth quarter and affordability rose.
In the fourth quarter the median priced detached home was $564,270. The California Association of Realtors reported that a minimum annual income of $122,340 was needed to qualify for a monthly payment of $3,060, including principal, interest and property taxes on a 30-year fixed loan of 4.95%.
Affordability on a $460,000 median-priced condo or town-home was 37% in the fourth quarter of 2018. An annual income of $99,730 was needed to qualify for a monthly payment of $2,490. On a regional basis the affordability index in Los Angeles Country was 24%, up from 22% in the second quarter, but down from 25% in Q4 2017. In Orange County affordability was just 20% in both Quarter 3 and Q4 2018, down from 21% in Q4 2017. Ventura County Q4 affordability was 29%, up from 28% in Q3, and up from 26% in Q4 2017.
Interest rates peaked in the fourth quarter of 2018. In October the 30-year fixed rate hit 5%! Rates are now down over one half percent. They are at the lowest levels in one year. That should boost affordability when the first quarter of 2019 figure is announced in May. Prices were also lower in the fourth quarter of 2018 than at their peak in the second quarter. In fact, it appears that the median price peak of $602,760 in June was an outlier, as buyer’s panicked just to get a home with inventory levels at record lows. Inventory levels rose in the fourth quarter and prices stabilized back down to first quarter 2018 levels. The median price was $564,760 and $557,600 In November and December respectively. I’m looking forward to seeing the first quarter 2019 affordability level. I won’t be surprised if affordability is back up to almost 30% as rates are lower, incomes which have been increasing about 3.2% annually are higher, and prices I expect will be about the same as in the fourth quarter.
The California Association of Realtors has not released January sales data yet. That should be tabulated and released any day. I’ll update you with these figures next week.
Have a great weekend,
Economic update for the week ending February 9, 2019
Stock markets ended the week almost unchanged after 5 weeks of solid gains - Stocks were mostly flat this week as renewed trade worries overshadowed a solid earnings reporting season. So far nearly two thirds of companies have reported earnings. Nearly three quarters of them beat expectations. The US and China agreed in December to hold off on any new tariffs until March 1, as it appeared that both countries’ economies were beginning to suffer. With that date approaching and no deal in place investors are getting anxious. The Dow Jones Industrial Average closed the week at 25,106.33, up 0.2% from 25,063.89 last week. It’s up 7.6% year to date. The S&P 500 closed the week at 2,707.88, almost unchanged from 2,708.53 last week. It is up 8% year to date. The NASDAQ closed the week at 7,298.20, up 0.5% from 7,263.87 last week. The NASDAQ is up 10% year to date.
Treasury Bond Yields lower this week - The 10-year treasury bond closed the week yielding 2.63%, down from 2.70% last week. The 30-year treasury bond yield ended the week at 2.97% down from 3.03% last week. We watch treasury bond yields because mortgage rates follow bond yields.
Mortgage rates lower this week - Rates at the lowest levels since March 2018 - The February 7, 2019 Freddie Mac Primary Mortgage Survey reported that the 30-year fixed mortgage rate average was 4.41%, down from 4.46% last week. The 15-year fixed was 3.84%, down from 3.89% last week. The 5-year ARM was 3.91%, down from 3.96% last week.
We should be getting January real estate sales data at the end of next week. If that data is available it will be included in next weeks update. If not it will be the following week. The California Association of Real Estate usually has numbers tabulated and released by the third week of the month for the previous month.
Have a great weekend!
304,000 new jobs created in January - The Bureau of Labor Statics reported that employers added 304,000 new jobs in January. That figure took experts by surprise and shattered their estimates of 170,000 new jobs. It marked 100 straight month of job gains. Furloughed government workers were not counted as unemployed, so the partial government shutdown did not affect these numbers. The unemployment rate rose to 4% from 3.9% in December. Its deceiving that the unemployment rate has risen. Usually that would signal less jobs and be negative economic news, but this time it actually signals that more people are feeling optimistic about job prospects and opportunities. They are entering the workforce and the labor participation rate is increasing. Wages also rose 3.2% from January 2018. That marked a third consecutive month of wage gains at the highest levels since the current expansion began. The only skepticism was that December’s job gains were revised from 312,000 all the way down to 222,000 which calls into question the accuracy of these unusually high initial monthly numbers.
Stocks up again this week - Stock markets started the year strong! The S&P recorded the largest percentage gain in January since 1987, rebounding from its worst December loss since the Great Depression. Corporate earnings for the fourth quarter of 2018 are coming in higher than expected. The Federal Reserve voted unanimously to leave rates unchanged, and announced “a pause” in interest rate hikes. January’s job gains were almost double the number that experts predicted, and wage gains were strong. So far, the now ended, longest ever partial government shutdown has not shown to have negatively affected the markets. The Dow Jones Industrial Average closed the week at 25,063.89, up 1.3% from 24,737.20 last week. It’s up 7.4% year to date. The S&P 500 closed the week at 2,706.53, up 1.6% from 2,664.76 last week. It is up 8% year to date. The NASDAQ closed the week at 7,263.87, up 1.4% from 7,164.86 last week. The NASDAQ is up 9.5% year to date.
Treasury Bond Yields lower this week - The 10-year treasury bond closed the week yielding 2.70%, down from 2.76% last week. The 30-year treasury bond yield ended the week at 3.03%, down slightly from 3.06% last week. We watch treasury bond yields because mortgage rates follow bond yields.
Mortgage rates almost unchanged this week - Rates at the lowest levels in 9 months - The January 31, 2019 Freddie Mac Primary Mortgage Survey reported that the 30-year fixed mortgage rate average was 4.46%, almost unchanged from 4.45% last week. The 15-year fixed was 3.89%, almost unchanged from 3.88% last week. The 5-year ARM was 3.96%, up from 3.90% last week.
December Southern California home sales - CoreLogic reported that the number of homes sold in Southern California fell 20.3%from the number of sales last December. That marked the fewest closed escrows on single family homes, which include both attached and detached dwellings, since December 2007, the start of the Great Recession. Prices rose just 1.1% from one year ago. It was the smallest year over year increase in the median price since prices began climbing in 2012. December’s median price of $515,000 was down about 5% from its all time high of $537,000 in June 2018. Fortunately, we have seen a strong pick-up in activity and more escrows opening in the past few weeks.
Have a great weekend!