Sep 2 2022 38376 1

Dated: September 2 2022

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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 form 9.1% in June.

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%, upfrom 2.67% last month.The 30-year treasury bond yield ended the month at 3.27%, upfrom 3.00% last month. We watch bond yields because mortgage rates often follow treasury bond yields.

Mortgage rates- TheFreddie Mac Primary Mortgage Surveyreported 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%, upfrom 5.30% at the end of July.The 15-year fixed was 4.98% up from4.58% last month.The 5-year ARM was 4.51% upfrom 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 tight labor market is one of the conditions that is fueling inflation.

U.S. existing-home sales - The National Association of Realtorsreported thatexisting-home sales totaled 4.81 million unitson a seasonally adjusted annualized rate inJuly, down 5.9%month-over-month from the annualized number of sales in June.Year-over-yearsales weredown 20.2%from an annualized rate of 6.03 million in July 2021. Themedian pricepaid 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 a3.3-month supply of homes for salein July, up from a 2.6-month supply last July.First-time buyersaccounted for29%of all sales.Investors and second-homepurchases accounted for15%of all sales.All-cashpurchases accounted for24%of all sales.Foreclosure and short-salesaccounted 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 thatexisting-home sales totaled 295,460on a seasonally adjusted annualized rate in July,down 14.4%from June, anddown 31.1%from July 2021 when 428,980 homes sold on an annualized basis.Year-to-date, California existing-home saleswere down 13.6% in July.The statewidemedian pricepaid for a home in July was$833,910, up 2.8% from $811,170 in July 2021. There was a3.2-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 of 2008. From the closings I have seen, August may be even worse with fewer closings. 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 this year. If you look just at the highest price ever reached in March, April or May of 2022, 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!

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