This week was quite a wild week in our economic and real estate markets!  Here’s Rodeo Realty President Syd Leibovitch’s latest weekly recap installment to be sure you’ve kept up in all that has been going on:
Q2 GDP at 4%, beats estimate of 3%  The Q2 GDP blew estimates out of the water as GDP surged after a disappointing Q1 of a negative 2.9% annualized rate! The economy also received a boost from business investment, auto and retail sales, government spending and investment in home building. Trade, however, was a drag for a second consecutive quarter as some of the increase in domestic demand was met by a surge in imports. Domestic demand rose at a 2.8 percent pace, the fastest since the third quarter of 2011. It increased at a 0.7 percent pace in the first quarter. Growth in the second quarter was driven mainly by consumer spending and a swing in business inventories. Consumer spending growth, which accounts for more than two-thirds of U.S. economic activity, accelerated at a 2.5 percent pace, as Americans bought long-lasting manufactured goods and spent a bit more on services. Consumer spending had braked to a 1.2 percent pace in the first quarter. Despite the pick-up in consumer spending, Americans saved more in the second quarter. The saving rate increased to 5.3 percent from 4.9 percent in the first quarter as incomes rose, which could mean more future spending. Wage inflation mentioned in the GDP report, did not prove correct today when the jobs report showed stagnant wages. Wage inflation mentioned in the GDP report was a big factor in the panic by investors that the Fed would be abruptly forced to end stimulus. This rocked the markets Thursday. The “second” estimate for the second quarter, based on more complete data, will be released on August 28, 2014.Fed Meeting Breakdown. The Federal Reserve meet this week and announced they will continue with the sixth reduction, phasing out QE3—again a $10 billion cut. QE3 purchases are now comprised of $15 billion in U.S. Treasuries and $10 billion in mortgage-backed bonds monthly, to begin in August. The taper loosens further the artificial cap that the Fed has placed on mortgage rates. As QE3 shrinks, mortgage rates are expected to rise. The moves did not surprise Wall Street. The Fed Funds Rate is expected to remain near zero percent deep into 2015.and the Federal Reserve has been vocal that QE3’s wind-down would be measured and steady, barring economic shock. Unfortunately, investors fear that economic shock could come at any time in the form of an escalated inflation report! Gold closed up sharply as a hedge against inflation.

The Fed signaled in its monetary-policy statement earlier this week that interest rates will remain low for an extended period. Policy makers took note of improvement in labor market, but they said a range of labor market indicators suggest that there remains significant underutilization of labor resources. After 6 straight months of 200,000 or more jobs added there is definitely a strengthening labor market. Although, the labor market is still considered to be worse than normal, declining unemployment and rising inflation will force the Fed to start raising its benchmark short-term interest rates earlier than expected in mid 2015. The statement conceded that inflation “has moved somewhat closer” to the Fed’s 2% annual target. But it added that long-term inflation expectations remain stable.

Freddie Mac Mortgage rates hold steady; 30-year averaging 4.12% Freddie Mac’s weekly survey came out yesterday and showed the average rate for a 30-year fixed-rate home loan is 4.12%, practically unchanged from last week’s 4.13%.  The 15-year fixed rate mortgage edged lower to 3.23% from 3.26% one week ago. The 5-year Treasury-indexed hybrid adjustable rate mortgage averaged 3.01%, up from 2.99% last week. The 1-year Treasury-indexed ARM averaged 2.38%, down from last week’s 2.39%. Jumbo 30 year rates came back to near the 4.25% levels today after rising to nearly 4.5% at one point yesterday!

US Government Bond yields and mortgage rates settle lower after Jobs data, but higher than last week after surging following the robust GDP report. Treasury bond yields settled today after rising sharply yesterday, as the U.S. employment report showing less job growth in July than June soothed concerns that the Federal Reserve may raise interest rates sooner than investors expect. 10 year Treasury note was 9/32 higher, yielding 2.52%, It was 2.48% last Friday. The 10-year note’s yield has fallen from 3% on January 2, 2014. The two-year note was 3/32 higher, yielding 0.492%. The five-year note was 10/32 higher, yielding 1.699%. Yields on short-dated notes are directly influenced by the Fed’s interest-rate policy, while long-dated bonds are more influenced by inflation which chips away the value of bonds over time.

U.S. Adds 209,000 Jobs in July, Unemployment Rate at 6.2%. As long as wages remain stagnant, putting pressure on consumer prices low and keeping inflation below the Fed’s target rate, analysts remain doubtful that the Fed will shift their timing for rate hikes ahead of the current projected timeline for liftoff of mid-2015. The steady growth in jobs is encouraging, but with July’s numbers so far below June’s unexpected surge, perhaps the job market is not expanding as rapidly as it looked last month.  Wage growth remained sluggish in July. Economists’s expectations of wage inflation beginning to take hold we’re not materialized when the jobs report was released. Wage growth was also discussed in the GDP report as a contributing factor of higher consumer spending and increased savings. This did not prove to be correct when the jobs report was released today. Average hourly earnings rose 1 cent from June to $24.45 last month, up 2% from a year earlier. The labor market isn’t delivering, but it’s making progress. One sign of progress is that more people are actively looking for that job they hope is out there, which accounted for the unemployment rate slightly higher than in June dispute the economy adding over 200,000 jobs.

Stock Market Ends July in Dive, despite a surge in GDP and corporate profits beating expectations? Thursday was noted as the worst day in months for financial markets. The stock market ended July with the sharpest decline in the Standard & Poor’s 500-stock index since April, while the Dow Jones industrial index fell more than 300 points, enough to eliminate all of its gains for the year.Energy stocks fell the most after Chevron reported weaker oil and gas production. Exxon Mobil had reported disappointing production figures the day before. The Dow industrial average lost 69.93 points today ending the week at 16,493.37. It closed at 16,960.57 last week. The blue-chip index lost 317 points Thursday, its biggest one-day drop since February. The S & P 500 index fell 5.52 points to 1,925.15, lower than last weeks close of 1978.34. The Nasdaq composite fell 17.13 points to 4,352.64. It closed last week at 4449.56. The S&P 500 index was down 3 percent for the week, its worst week of the year.

The drop began exactly when the market should have surged as the 4% annualized growth rate was announced for the second quarter GDP, which far exceeded the 3% that was projected. It also followed a dismal first quarter GDP report in which the economy shrunk at an annual rate of 2.9%, thats a negative 2.9%!  The Fed meeting statement was released the following day which was intended to calm investors fears of higher interest rates. Unfortunately, due to a surge in job growth, a rising GDP, and signs of higher inflation, fears of the Federal Reserve ending stimulus began to rock the markets. It should be noted that the amount of stimulus since the Great Recession  is not only the most stimulus in US history, it makes any other amount of stimulus in history look microscopic! Nobody thought that the stimulus program would go on for much longer, but these numbers have been so positive that The Fed has no choice to pull back and end these programs. Sooner rather than later, according to economists.  This will lead to higher rates. Higher interest rates will lead to higher interest payments for corporate debt which has increased considerably partially due to historically low borrowing costs. This in turn will lead to lower profits.   The jobs report, although good was not as good as expected, and wage growth in the jobs report did not show the wage inflation noted in the GDP report. That did calm the markets and relieve some pressure on the Fed for now. Economic sanctions on Russia that have increased tensions with the West also played a role, as  European markets were the first to drop.  Argentina’s debt default Wednesday also did not help, as those bonds are held by American investment Firms. Plus there’s also the general worry by investors that stocks are overpriced. For the last two years, investors have typically stepped in to buy any major fall in the stock market. A sell-off would often be met the following day with modest buying. Traders said that Friday’s selling, on top of what happened the day before, is not a good sign, although the market did recover some late in the day.
Applications for U.S. home mortgages fall this week as refinancing applications drop. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 2.2 percent in the week ended July 25. The MBA’s seasonally adjusted index of refinancing applications fell 4.0 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, rose 0.2 percent.

This week we saw more open escrows than the previous few weeks. We are still seeing inventory increasing, as home prices have flattened. Many homes have had price reductions. At the same time mortgage interest rates are still at or near the lowest levels in a year. Perhaps the lower interest rates, more homes for sale, and lower listing prices are causing more sales!? It’s too soon to tell. One week doesn’t exactly start a trend, but we are optimistic!
Have a great weekend!

Syd Leibovitch

If you’d like more information on the San Fernando Valley or Los Angeles, or to have help looking for your next home, please feel free to reach out! I’m happy to help, no obligation.

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