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San Francisco Bay Area Market August 2022 Update

San Francisco Bay Area Market August 2022 Update

July 2022 San Francisco Bay Area Market Update

July is the first month in the recent ten years when all counties median home prices dropped compared to the previous month. In June’s data, Solano was the only one that managed to maintain a 1.5% gain

Is the economy in recession?

The technical answer is yes. It’s a widely accepted standard that when the GPD shrinks for two consecutive quarters, it’s considered a recession. Why? Why? The answer has two folds:

First, the Federal Reserve has these so-called dual mandates pursuing maximum employment and price stability. In the current market condition, unemployment is still at a historic low of 3.6%, while inflation has been at an all-time high since 1981. Therefore, the Fed has no reason not to fight inflation hard by raising interest rates.

Second, tinkering with the interest rate is the Fed’s primary monetary policy tool to stimulate the economy in a recession. Since the Fed has kept the interest rate too low for far too long since 2008, the Fed has effectively lost the power of this primary tool. As a result, it has been waiting for an opportunity to raise the interest rate again SO THAT when the economy is in trouble, the interest rate tool can function again, financially and psychologically.

Does the Fed care about the housing market and stock market?

Based on the Fed’s dual mandate, the answer is no. The stock market and housing market represent asset prices, not consumer prices. Their ups and downs may affect investors’ balance sheets but not the majority’s cost of living. If the housing or stock market crash, so be it. The only way for the Fed to care about it is if these crashes will impact the Fed’s goal of maximum employment and price stability.

So what will happen next?

The housing market and stock market will likely go through more adjustments until either the inflation is tamed or unemployment starts to go up to an unhealthy level. These two conditions will cause the Fed to change its policy direction. In my opinion, the Fed will likely see subsided inflation by mid-2023 and at which point it will stop raising the interest rates in the 2nd half of 2023. There will be more layoff announcements between now and then. The housing market will likely be 15-20% below its 2022 peak. The economy will experience an actual recession by then, and fortunately, the Fed will have loaded its monetary policy tool with ammunition to fight the actual recession at that point.

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Lex Shan

Lex is a real estate broker, real estate developer, entrepreneur and technologist. He has started an architectural design firm, real estate development private equity fund and California's largest real estate 3D marketing company.

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