Economic update for the week ending July 23, 2022

Stock markets ended the week higher - Most companies have reported that second-quarter profits beat earnings estimates. That gave a boost to stocks this week. Even tech stocks, which have been beaten down significantly, had a great week. The news was not all good for tech stocks. Tesla beat expectations but Snap did not. Snap dropped 39% on Friday which spilled over to social media stocks and other sectors and stock markets ended lower on Friday, ending a three-day rally. Investors were also feeling optimistic that dropping gas prices, some settling in food prices, easing of supply-chain shortages and some economic data indicating that businesses may be pulling back on spending, may keep the Fed from being as aggressive with interest rate hikes as thought just a week ago when the CPI report was released. Some feared a full point rate hike at the next meeting. That seems very unlikely now. The Dow Jones Industrial Average closed the week at 31,899.29, up 1.9% from 31,288.26 last week. It is down 12.2% year-to-date. The S&P 500 closed the week at 3,961.63, up 2.5% from 3,863.19 last week. The S&P is down 16.9% year-to-date. The NASDAQ closed the week at 11,834.11, up 3.3% from 11,452.42 last week. It is down 24.6%, year-to-date.

U.S. Treasury bond yields higher this week - The 10-year treasury bond closed the week yielding 3.00% down from 2.93% last week. The 30-year treasury bond yield ended the week at 3.10%, down from 3.10% last week. 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 July 21, 2022, for the most popular loan products were as follows: The 30-year fixed mortgage rate was 5.54%, up slightly from 5..51% last week. The 15-year fixed was 4.75%, up from 4.67% last week. The 5-year ARM was 4.31%, down from 4.35% last week.

Weekly Mortgage Applications

The MBA weekly mortgage application index declined by -1.7% for the week ending July 8th. Purchase applications fell by -4.0% and were -18.0% lower than the same week last year. Refinance applications increased by +2.0% but were -80.0% lower vs. the same week a year ago. "Mortgage rates were mostly unchanged, but applications declined for the second straight week. Purchase applications for both conventional and government loans continue to be weaker due to the combination of much higher mortgage rates and the worsening economic outlook," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. "After reaching a record $460,000 in March 2022, the average purchase loan size was $415,000 last week, pulled lower by the potential moderation of home-price growth and weaker purchase activity at the upper end of the market." Added Kan, "Refinance applications increased slightly last week, driven by an uptick in conventional and FHA refinances. The overall refinance index remained 5 percent below the average level reported in June. With the 30-year fixed rate 265 basis points higher than a year ago, refinance applications are expected to remain depressed."

U.S. existing-home sales - The National Association of Realtors reported that existing-home sales totaled 5.4 million units on a seasonally adjusted annualized rate in June, down 5.4% month-over-month from the annualized number of sales in May. Year-over-year sales were down 14.3% from the annualized rate of 5.97 million in June 2021. The median price of a home in the U.S. in June was $416,000 up 13.4% from $366,900 one year ago. June marked a record 124 consecutive months of year-over-year increases in the median price. There was a 3-month supply of homes for sale in June, up from a 2.5-month supply last June. First-time buyers accounted for 30% of all sales. Investors and second-home purchases accounted for 14% of all sales. All-cash purchases accounted for 25% of all sales. Foreclosure and short sales accounted for less than 1% of all sales remaining at a historic low.

We have seen more homes come on the market in the past few weeks. Perhaps sellers feel that prices have topped out. Those listings are selling quickly if they are priced correctly. The vast majority of the homes sold are still receiving multiple offers, but they are not receiving the number of offers that they would have received a couple of months ago. We are seeing two to four offers, not twenty! The homes priced too high are sitting. Once reduced to the correct price those are selling as well, but not with the excitement and urgency a new listing gets. These new listings will begin to close in August. I expect that the number of sales will increase in August from the anemic number of sales we saw in June and that I expect in July, which seems to also be shaping up as a month with a low number of sales. June and July should be the fewest number of sales we see in a month for a long time. That’s what I am seeing on the street.

Housing Starts

Housing Starts in June dropped -2.0% to 1.559mln units, with May's numbers revised from 1.549mln to 1.591mln. Looking YoY, headline starts are down -6.3%. Single-family starts for June dropped by -8.1%, while multi-family starts gained +15.0% on the month. By region, the Northeast added +10.6%, with the West up +3.7%, the South down -4.8%, and the Midwest down -7.7%. June's building permits dropped by -.6%, however, are still up +1.4% when looking YoY. Single-family permits for June declined by -8.0%, while multi-family permits rose by +13.1%. Broken out by region, the Northeast posted the largest gain once again, up +18.0% on the month, followed then by the West up +5.8%, the South losing -2.1%, and the Midwest down -15.7%. Finally, housing completions also were on the weaker side for June, down -4.6%, even though they are still +4.6% above the June 2021 level. Overall, single-family unit starts and permits have fallen sharply over the past few months, and both are now at their lowest levels since June 2020. However, strength in multi-family building has offset some of that weakness. Financing costs remain a headwind for multi-family building, but market rents are up around +15% annually, and rental vacancies remain very low, all of which is creating an incentive to build more units.

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