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 investors' renewed confidence based on three key issues:
1) 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.
2) 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.
3) 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.