Can House Prices Rise as Sales Slow?

Here is an interesting picture. The S&P/Case-Shiller House Price index showed prices in the 20 largest cities increased 13.3 percent annually in September, the highest year-over-year increase since February 2006. Yet, existing home sales have slowed a bit and pending home sales have been lower for several months, according to the National Association of Realtors. How can home prices be rising at a time in which home sales are slowing down? The answer is found in two important numbers. For one, the percentage of distressed sales is falling as the foreclosure inventory shrinks. LPS reports that the foreclosure inventory is down 30% over the past year. Since distressed homes sell at a significant discount over non-distressed sales, it makes sense that the average sale price is rising. During the height of the housing crisis, the flood of foreclosed homes exaggerated the drop in home prices and on the way out of the crisis, the rise in home prices his now exaggerated by the lower numbers of these sales.

Secondly, we still have a lack of inventory in many markets, especially at the lower end of the market. Housing sales are being held back because of this lack of inventory but at the same time we are not seeing slower housing sales cause downward pressure on prices. If there is more demand than supply, prices will be stable or rise regardless of the number of total sales. What does this mean for the future? If demand continues to rise, housing prices will continue rising or at least stabilize. The first factor -- distressed sales --- will become less of a factor in the future as we approach normalized levels of distressed sales.

The key is demand. If the economy continues to produce jobs at a decent rate, then we will have a greater demand for the real estate market. That is what makes November's employment report interesting. Heading into December we had a series of numbers which pointed to a stronger jobs market, including the lowest number of first time claims for unemployment benefits since before the recession started and a strong October employment report. This made the markets optimistic before the numbers were released. And the numbers did not disappoint as the economy once again created more than 200,000 jobs and the unemployment rate dropped to 7.0%.

Mike Ervin

Mortgage Banker

NMLS # 252715

C: 650.766.8500

mike@mikeervin.com

The Muddled Oil Picture

We find it kind of interesting that the stock market continues to hit records at a time in which oil prices are moderating. Conventional wisdom tells us that the stock market rallies when the economy is getting stronger. A stronger economy causes higher demand for energy. That would cause oil and gas prices to rise. Yet, in August oil prices pushed to approximately $110 per barrel and by the middle of November, they had receded to below $95.00 per barrel. In the meantime, in the middle of November stock prices hit record levels again. Why the disconnect? Some of the drop in oil prices could be associated with the uncertainty which accompanied the government shutdown -- however the stock market did not seem to be affected by the shutdown and oil prices did not rebound when the shutdown was over. There are also seasonal factors. We got through the hurricane season without any major storms which could have damaged our ability to produce oil. Finally, the progress towards the Iranian nuclear agreement also weighed in on oil prices.

On the other hand, there were some additional important announcements that are affecting the overall picture. The International Energy Agency reported that the U.S. will surpass Saudi Arabia as the top oil producer in the world by 2015. The Administration also announced in November that our oil production is at a 24-year high and our imports are at a 17-year low. The factors for this include both new oil extraction technologies such as fracking and more energy efficient cars. Long-term projections in the IEA report were not as optimistic; however, for now the energy picture is getting better. Why is this important? As the economy grows, if oil prices also increase this causes a drag on economic growth. If in 2014 oil prices stay where they are, consumers will have more money to spend in other areas --from furniture to cars to houses. In other words, if it holds the oil price picture could be very good news. Meanwhile this week we will see another jobs report. This one is sure to be interesting as a follow-up to the surprisingly strong report from the previous month.

 

Mike Ervin

NMLS # 252715

C: 650.766.8500

P: 650.735.5261

mike@mikeervin.com

Happy Thanksgiving

It is all about turkey and giving thanks this week. As much as we have struggled to rebound from the financial crisis and recession during the past five years, we have plenty to be thankful for. For one thing, our rebound did happen -- albeit very slowly. Just a few years ago, economic prognosticators were predicting that real estate would not rebound for at least a decade. It has been five years and we are already at least one year into a rebound. Again, we are not all the way back but at this point you can't deny the progress we have made. No longer is the number of homes going into foreclosure leading the headlines. Now the drop in the number of foreclosures highlight the statistics.

The same can be said for the job market. We lost over eight million jobs during the recession and it has taken us this long to come up close to making up those eight million jobs, which does not account for the population growth of the past five years. Yet, the unemployment rate has dropped from 10.0% to close to 7.0% -- a drop of almost 30% in four years. According to the Federal Reserve Board, the unemployment rate is poised to drop further in the coming months. We took a very large economic punch in the gut five years ago and we have now regained our footing and we are now punching our way back. That is called resiliency. And when others face tragedies such as the Typhoon that hit the Philippines a few weeks ago, we step up and help others in need. Yes, the past few years have been a struggle for millions, but we also have a lot to be thankful for -- not the least of which is the turkey we will have on our plates tomorrow.

Mike Ervin

NMLS # 252715

C: 650.766.8500

P: 650.735.5261

mike@mikeervin.com

Maybe It's Not a Fluke

Maybe It's Not a Fluke

Two weeks ago we published a column entitled "Words of Optimism." Last week a surprisingly strong employment report was released. Was this a coincidence or was it an accurate prognostication? We do know that the jobs data can be tricky. What looks strong one month can be reversed the next month as the new month's data is always accompanied by revisions of previous numbers. Thus, we would need to see two or three months of strong jobs reports before we declare a turnaround and a great prediction (or a lucky guess). On the other hand, the words of optimism were based in fact and those facts included the important numbers regarding increased household formulation. As a matter of fact, household formulation and jobs data are clearly linked.

As more jobs are created, more households are created as children move out on their own. This demand for housing -- both rental and purchase -- creates more jobs. This relationship created a vicious cycle during the recession. Today it could influence the start of a virtuous cycle in which the economy is buoyed by both factors working together. Again, our thoughts are not just the result of rampant speculation. A recent report by the Federal Reserve Board indicated that the employment rate was set to fall in the coming months -- "Across the board, these indicators show the pace of the labor market recovery has increased compared with a year ago," wrote Mary Daly, the San Francisco Fed's deputy research director, and colleagues Bart Hobijn and Benjamin Bradshaw. "We take this as evidence that the recovery in the labor market is robust, broad-based, and likely to continue, if not accelerate, over the coming months." (Reuters). So, perhaps the surprising jobs report was not a fluke. But we still need to see a few more months of data to really determine if this is the case.

Mike Ervin
Mortgage Loan Officer
NMLS # 252715
C: 650.766.8500
P: 650.735.5261
mike@mikeervin.com

Employment Report & Turkey Day

A busy week included both an Election Day and a release on the employment numbers for October, as well as numerous additional points of data. The employment report was surprising to say the least with the markets assuming that the government shutdown would have held a lid on hiring during the month while government workers were furloughed. Not only was the addition of over 200,000 jobs more than expected last month, but the previous months data was adjusted higher as well. Economic data measuring activity in the manufacturing and service sectors also exceeded expectations. This strong data is important with regard to influencing measures of consumer sentiment which had turned lower during the month as the shutdown drama unfolded. From here, stronger consumer sentiment is critical. Why? Because it is shopping season.

November is the start of the Holiday Season and market analysts will be at the malls more frequently. Perhaps they will be doing some shopping, but more than likely they will be measuring early data regarding how busy the shopping season will be. Each year, store traffic becomes less important because so many are shopping on line. We are approaching both Black Friday and Cyber Monday in a few weeks. Though the word is that many stores will be open on Thanksgiving Day and perhaps Black Friday will become Black Thanksgiving Weekend. Certainly on-line shopping is open on Turkey Day so why not the stores? Well, those who have to work Thanksgiving Day certainly will not be thrilled -- unless they don't like turkey and football.

Let the games begin!

Mike Ervin

NMLS # 252715

C: 650.766.8500

P: 650.735.5261

mike@mikeervin.com

Words of Optimism

Like the past few years, economic growth has not been strong in 2013. Yet, for some reason this year the country seems to have more optimism regarding prospects for the future. The obvious question is--why the optimism? To us it all boils down to two words --- household formation. The creation of households bottomed during the most recent recession--down to below 400,000 per year from an average of 1.2 million per year over the past 65 years. This lower average was a significant drag on the economy. In the past two years, annual household growth has soared back to 1.1 million in 2011 and 2.4 million in 2012. Kids are moving out of their parents' houses in droves. Why is this increase in household formation so important? It is more than just a direct relationship between formation and the need to build homes.

Even if the kids move out and rent an apartment, this increases demand for multi-family housing and we have seen this market recover significantly. Some will purchase or rent single family homes. And starting a household requires the purchase of furniture, cars, insurance and more. If you look at the projections for growth in the next few years, it is no wonder that single family home starts are expected to double from the depths of the recession by 2015 (see the article in the news section). It is also no wonder that the job growth is predicted to increase substantially in the next six months according to a Federal Reserve Bank of San Francisco report. We may be in a pause now because of the effects of the government shutdown and the accompanying uncertainty; however, growth spurred by household formation is inevitable. There can always be intervening variables, but the numbers are there for a solid recovery moving forward from here.

Mike Ervin

NMLS # 252715

C: 650.766.8500

P: 650.735.5261

E: mike@mikeervin.com
















 

Resilient Markets

It has been five years since the collapse of the financial markets. Five years ago, the world financial systems were on the brink of collapse. For five years we have been crawling out of a deep hole. You can't get very far by crawling, but if one moves forward little-by-little for five years, how far we have come will look very impressive. Let's just look at the stock markets. Early in 2009 the Dow Jones Industrial Average bottomed at just under 6500 in reaction to the crisis. This year the Dow has topped 15,500 twice. That is a gain of approximately 140% in under five years. Even more impressively, the gain does not seem to be slowing much as the rally matures. Thus far in 2013, gains have exceeded 15%.

Every time the markets look like they are in the middle of a correction, they seem to bounce back nicely. This year, the market has been affected by rising interest rates and the situation in Syria. Each time there is a pull-back it is brief and then a comeback ensues. One has to ask if there is more room on the upside after such a run. The answer boils down to two issues. First, will the economy keep recovering at a decent pace? Second, will this recovery cause interest rates to rise high enough to slow down the train? The economic recovery is definitely stronger today paced by a recovered auto industry and recovering real estate markets. But it still has not been strong enough to create enough jobs to replace those lost in the recession, let alone keep on pace with population growth. The statement released after the meeting of the Federal Reserve Board last week echoed that concern. Growth that is too strong might actually turn out to be a recipe to slow the run we have seen.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

It Really Does Mean Something

For the past few years since the recession ended and the stimulus plans were put in place, every meeting of the Federal Reserve Board has meant very little to the financial markets. The Fed had basically shot every bullet in their gun by forcing interest rates down to unheard of levels. Typically the Fed focused upon only short-term interest rates by lowering discount and federal funds rates. But the severity of the recession and tenuous recovery called for unprecedented medicine in the form of purchases of hundreds of billions of dollars of Treasuries and Mortgage-Backed Securities. These purchases were designed to not only keep long-term rates low but also help shore up a residential finance market.

Every meeting of the Fed since that time has created no suspense whatsoever. Running out of things to say, the Fed reached into their bag of rhetoric and made statements such as -- we will keep rates low at least until 2014, which was quite a statement back in 2012. This week's meeting of the Federal Reserve Board tells us that recently the ho-hum part of Fed watching is over. Long-term interest rates have risen significantly this year, mostly on speculation that the Fed will taper off purchases of long-term interest rate securities in the face of a recovering economy. However, while the economic numbers have been better this year, employment growth is still not strong enough to keep pace with population growth and the over-all expansion of the economy is still tepid at best. So what is the Fed to do with the economy still not strong but the markets feeling like the time is right for rates to get back near "normal"? That is where the suspense comes in. Only a strong statement from the Fed can influence the markets in this environment.

Mike Ervin
Mortgage Banker
NMLS # 282715
(650) 766-8500
mike@mikeervin.com

The Employment Report "Report"

Every month we seem to sit on edge waiting for the employment numbers. There is good reason for this, of course. During the recession America lost several million jobs and we have yet to recover fully from these significant losses. Though the unemployment rate keeps falling from its peak during the recession, it is nowhere near the low of 4.4% we reached in 2007. What we are talking about is slow and steady progress. A drop in the unemployment rate from 10.0% to 7.3% is pretty significant. But at least some of that decrease is due to many adults leaving the labor force. That includes those who are retiring and those who become discouraged and put their job hunt on hold. For example, a spouse may decide to stay at home with their children if the job they can find does not pay for child care and other expenses of working.

This slow and steady progress mirrors exactly the state of our economic recovery for the past four years. Slow growth is much better than a recession or no growth. But it is not strong enough to satisfy our appetite for repairing the damage done by the recession. The real question is whether the Federal Reserve Board thinks that the jobs numbers are strong enough to start easing off the gas pedal with regard to stimulus activity. Interest rates have risen precipitously this year in anticipation of the Fed reversing course. The Fed is watching the jobs numbers closely as well. The average jobs creation for the past three months has been just under 150,000 per month. That is a big improvement from the recession years, but not strong enough to keep up with population growth. If the Fed concludes the numbers are not strong enough, we may enjoy lower rates for a longer period of time. And that would be good news. The Fed meeting this month will be watched closely for clues in this regard.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

Back to Oil Prices and Real Estate

A few weeks ago I discussed the effect of higher oil prices on the economy. We know that as energy prices rise, it saps strength from the economy because consumers have to use more of their income to pay for the cost of energy. In the past few months oil prices have risen to over $105.00 per barrel--and that was before Syrian crisis hit the headlines last week. The price of oil has escaped the forefront of discussion this year because we have not seen gasoline prices spike at the same time. In the long run we know that higher oil prices will lead to higher gas prices as well as increased costs for other forms of energy. My focus today is not on the short-term effects of energy with regard to the economy. Today our focus upon the long-term effects of higher energy prices on real estate. If you look at the real estate recovery we are experiencing more recently, the price of energy is a factor.

The present real estate recovery is uneven in many ways. Lower priced homes are hot and the luxury home market is not recovering at the same pace. Some states are hot while others are still languishing. Another trend shows that inner cities and close-in suburbs are doing better than outlying areas. It is here where we think energy prices are a factor. We have reported previously that the Millennial Generation does not want long commutes. Many prefer to use mass transit or live walking distance from work. This has become an important factor in this decade because for a generation, inner cities have suffered as the suburbs boomed. Now the tide has turned in many cities. Will this trend continue? Any future spike in energy prices will certainly serve to reinforce this new trend. I think that this story bears watching with regard to the future of real estate. Meanwhile, back to the present. This week comes the all-important jobs data which will make it an interesting back-to-work and back-to-school week. The most recent run-up in rates could be reinforced or reversed by employment data that surprises in either direction.

 

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

Europe Rises From Recession

Many have wondered why interest rates have risen so sharply this year without the economy showing significant enough strength to heat up inflationary pressures. Yes, the threat of the Federal Reserve decreasing stimulus by lowering their purchases of Treasuries and Mortgage Backed Securities hovers over the markets. Yet, the Fed would not be considering lessening stimulus if they were not more confident about the economy. We must remember that these extraordinary measures were put in place to keep us out of a second recession as the world-wide economy was slowing while we were struggling to come back from our deep recession. How many times did we hear that Europe's recession and fiscal crisis could drag us back into recession?

In the past we asked the question -- will Europe pull us back into recession or will we lead Europe out of recession? We surmised that if the real estate markets in the U.S. continued their recovery, then it was more likely that we would help lift Europe up. While I can't say there was a direct relationship, the news released recently that the Eurozone had a positive quarter of growth bodes well for this scenario as well. A 0.3% growth rate for the 17-nation area is nothing to write home about, but it is progress. Keep in mind that the central banks in Europe have been applying their own brand of low interest rate stimulus. The fact is that Europe is not out of the woods and we are a long way from a normal recovery. However, the easing of Europe's recession weakens another threat to our economy. The Fed's reaction to lessen stimulus is a normal reaction to the lessening of threats. We are still a long way from ending all stimulus activity from the Fed but we seem to be on the doorstep of the first move.

 

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

The Price of Oil, Interest Rates and Real Estate

With all the attention focused recently on rising interest rates, we still have recognized the fact that rates remain near historic lows. On the other hand, as rates have risen and the stock market has climbed, oil prices have headed above $100 per barrel once again. Yet, there seems to be very little concern or news regarding this latest spike. In the past, the rising price of all set off alarms as analysts expected higher oil prices to lead to a slower economy because consumers will be spending more of their budgets on the cost of energy. Of course, a slower economy can lead to lower interest rates. What is really interesting is the fact that this summer higher oil prices have not lead to significantly higher gasoline costs. Why is that? While it makes sense that oil prices will directly affect the price of gas, one should remember that a variety of other factors will affect the price of gasoline.

These factors include the amount of taxes levied upon gasoline, the amount of local refinery capacity, the cost of shipping and also the availability of potential alternatives to gasoline. For example, U.S. oil and natural gas reserves are increasing dramatically because of new technologies such as shale oil production. Regardless of what the politicians will tell you, while this increased production may help make the U.S. energy independent, it will not necessarily affect the price of oil world-wide. However, because the oil is extracted locally, it has the potential to reduce the price of producing gasoline. This does not mean that gas prices will fall precipitously while oil prices rise. Eventually, the relationship will be reestablished. With regard to interest rates and real estate, the price of gasoline does affect trends in the real estate sector. As a matter of fact, a major real estate trend has been influenced by these prices. We will present more on this trend in an upcoming issue.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

The Credit Pendulum To Move Faster?

My how time flies. The housing boom America experienced in the past is now almost a decade old. If anyone can remember that far back, the boom was made possible in part through an unregulated market for home loans which brought us such programs as "no money down -- we don't ask about your income -- low credit score -- you can't believe how low your payment will be" adjustable rate loans. Basically, if you could breathe then you could purchase a home. The subsequent housing crisis ended all semblance of this easy credit as the credit pendulum swung drastically the other way. For some time you needed not only to fog a mirror to purchase a home, you needed to walk on water. For a while the secondary market in which lenders were able to sell loans to unsuspecting investors totally disappeared and government alternatives such as FHA, Fannie Mae and Freddie Mac dominated the residential finance markets. For years readers have been asking, when will credit loosen again?

My answer has been very standard. There were two conditions that must be in place for credit to ease. First, the real estate market must get stronger. After all, it is real estate that secures these loans and if the investment is not stable, lenders will be more reticent to lend. Secondly, rates must rise. You may be tempted to think that lenders were waiting for rates to rise so that they could make more money on each loan. However, these loans are typically originated to be sold on the secondary markets to alleviate market rate risk. Rates needed to rise so that lenders were not inundated with refinances. If lenders don't have time to process the applications they had in their pipeline, why would they loosen credit standards to bring more in? Well, if you read the article in the news section -- this is exactly what has been happening. In the long run credit standards have been easing very, very slowly. But now that the real estate market is stronger and rates have risen to slow refinances, the trend potentially can accelerate. Keep in mind we are not talking about returning to the standards of the boom times of yore, but we expect standards to get more reasonable if these trends continue.

 

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

Is This What It Feels Like?

The Great Recession officially started in December of 2007. It officially ended in June of 2009, according to the National Bureau of Economic Research. However, the economic recovery since that time has been anemic to say the least -- "In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity," the NBER reported in September 2010. After meandering around for over three years since the end of the recession, the economy seems to be returning closer to a normal recovery pattern. This is an extremely long time for a period of returning to normalcy. There is some good news regarding this struggle we have had. For one, the overall recovery has been weaker than normal, yet should last longer than a normal recovery. And we have already seen that interest rates have stayed lower for a longer period of time.

As a matter of fact, this period of record low interest rates is absolutely unprecedented in our history. We will note that oil prices have fully recovered from recessionary prices a while ago. It was only recently that rates started to rise. So the next question is--will rates continue to rise as the economy gets stronger? The most important data to watch in this regard are the employment numbers and releases within the real estate sector. Certainly, these two factors are tied because as one gets stronger so does the other. Right now, we are not seeing numbers that show our economy is overheating. Retail sales are still struggling, especially outside the automobile sector and energy expenditures. Car sales continue to be in recovery mode along with the real estate markets. The bottom line? Yes, the recovery seems to have reached a new phase, but this is not a strong recovery as of yet. We are still in danger of influences that could scale back the recovery and if these scenarios occur, rates could continue to stay low. However, if momentum continues to build, rates could continue to increase in the short run.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

Why Predictions Don't Work

In the past couple of months we have seen how futile it can be to try and predict the future. If one were to look at the stock market for the first half of the year, everything seemed to be coming up roses. Who can complain about a ten percent increase in the major stock indices in just six months? On the other hand, many analysts predicted that the price of oil would come down this summer. Events in Egypt reminded us quickly that predictions are useless. Oil moved up significantly at the end of June. The next question is whether higher gas prices will cause the economy to slow down while consumers adjust their spending patterns. The same can be said about interest rates.

Many analysts predicted that long-term rates would rise this year. Few predicted the scope of the rise as rates on home loans have moved up from historic lows overnight. Will this increase affect consumer spending? In the short run it appears that consumers are coming off the fence and purchasing homes in reaction to the increase in rates. This is giving real estate another shot in the arm. But what about the long-run? For a year we have warned consumers that there would be no notice when rates rise and the sale on America's real estate ends. We could not predict when and how quickly it would happen. Now we know. The good news is that rates are still low when measured against historical patterns. Those who are older remember rates on home loans which were 15% or higher. Today, we will not predict whether higher oil prices or interest rates will slow the economic recovery which finally seems to be gaining steam. But we certainly will hold out that possibility.


Mike Ervin
mike@mikeervin.com
www.mikeervin.com
(650) 766-8500
NMLS # 282715

The Link -- Higher Home Prices & Rates

For the past two weeks we have assessed the reasons that home prices are rising. Without rehashing this data, suffice it to say that home prices are rising because the real estate market is finally recovering from a horrible slump. Many analysts are now debating whether recently rising interest rates may put a halt to the real estate recovery and the stock market rally as well. In our mind there is a direct relationship between rising home prices and higher rates. Why? For the past three plus years, we have seen a tepid economic recovery from a very deep recession. If one looks at the numbers today, the recovery still does not look strong. The economy has grown at an average of just over 1.0% for the past two quarters. That is not exactly robust numbers. The difference is that today the economy is being supported by positive growth from the real estate markets.

Real estate is a big part of the economy that fuels important behaviors such as consumer spending. When someone buys a house, they also tend to purchase furniture and undertake home improvements. We believe the markets are thinking about the future, not the past two quarters. Two years ago when economic growth slowed down, there was significant talk of another recession. Today, you don't see the same level of fear. Home prices are up because the real estate markets are recovering. Rates are up because the economic recovery is on more sound footing with a real estate recovery supporting the upturn. The jobs report released on Friday was definitely indicative of this better news. Not only was the 195,000 jobs added more than forecast, the previous two months were revised higher by 70,000 jobs and hourly earnings had a solid advance as well.

Mike Ervin
mike@mikeervin.com
www.mikeervin.com
(650) 766-8500
NMLS # 282715

Why Are Home Prices Rising--Part Two

Last week we introduced statistics regarding rising home prices and introduced the first two reasons for this increase. These reasons included tighter inventory and an upward "bounce" from very low prices in certain areas of the country. This week we will present the second two reasons: economics and demographics. The economic rebound has been going on for years, but at a very slow place. However, this is the first year that the markets do not seem to be concerned with a threat of a double-dip recession. The rebound may not be strong, but it is enduring. This means that many families have seen their finances stabilize and confidence grow. Even more importantly, household formulation is up from recent lows and this causes increased demand for housing. Which brings us to the second reason--demographics. We will give you one projection released recently by the U.S. Census Bureau: The high series projects that the U.S. population will hit 400 million by 2044.

Today, the U.S. population is just over 315 million. So that means that as much as 85 million people will be added in the next 30 years, or close to one million per year. A perspective? In 1900 the U.S. population was approximately 76 million. So in 30 years we will have more growth than we had in the first 125 years. And while the economy was slumping, the population did not stop growing. This leads us to the final question -- will home prices keep rising in the short run? As we have presented previously, the shortage of inventory will disappear as prices rise and more homeowners (and banks) realize that they can get more for their homes and thus will offer them for sale. Recent data indicates that is happening. With more inventory, we are expecting the rise in home prices to slow down. However, with increased demand due to population growth, increased household formulation and confidence -- house prices could continue rising at a more sustainable level. Of a more immediate note, the employment report this week will be watched closely as the stock markets have experienced a wild ride while long-term rates have risen sharply over the past several weeks. We believe that the rise in home prices is actually very much related to the rise in rates. More on that next week.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

Why Are Home Prices Rising?

Statistics released this spring show that both new and existing home prices have risen significantly over the past twelve months. For example, the census bureau has indicated that the median price of a new home sold in April was $271,600, which was 8.3 percent higher than the previous month and 13.1 percent higher than one year ago. This is interesting news not only because it affects those in the market to purchase a home, but the economy in general. Wealth is created through rising home prices and this wealth has the potential to increase consumer confidence and thus consumer spending. Two questions arise from here--why are home prices rising and will they continue to do so? They are very interesting questions because just a few years back many were predicting that home prices would not recover for decades. In our opinion, it is also no coincidence that rates are rising at a time when home prices are rising and the real estate market gets stronger.

There are four reasons that home prices are increasing. For one, home prices dove down too low during the slump. In many areas the price of homes was below the replacement cost of purchasing a home. With so many foreclosures on the market, there was too much downward pressure on home prices. In addition, the cost of owning came in significantly below the cost of renting --especially when record low rates were factored into the equation. Investors across the nation recognized these economics and came in to purchase excess inventory to lessen the foreclosure issue and the equation quickly reversed. This caused the second reason for higher home prices--a tightening of inventory caused the price of homes being "bid up" in many cases. Across the nation, we have seen evidence of multiple bids on properties up for sale--especially at the lower or middle end of the market. This has created the opposite situation with regard to why home prices dove due to bank sales. In essence, reasons one and two have created a bounce in the market. The last two reasons? The economy and demographics. We will discuss these in part two of this series, as well as the future outlook for home prices.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com

What Do Higher Rates Mean?

I do not mean to beat a dead horse here; however the topic of higher interest rates seems to be dominating the headlines of the financial world. While these articles dissect the possible effects of higher rates on the stock markets, business performance and more, the question we would like to focus upon is -- how do higher rates affect the average individual? There is no doubt that these rates may make home and car financing more expensive -- but by how much? As of recently, rates have risen a little more than .50% from rock bottom record lows. What does one-half of one percent cost? Using a base of $100,000, this would raise the cost of owning a home by approximately $42.00 per month. If one were financing $300,000, then the additional cost would be $125 per month. These numbers are presented before the effect of taxes is taken into account. Most homeowners can deduct the cost of interest. In this case we will assume a tax bracket of 25%, which would lower the cost of the increase to around $94.00 per month.

Another effect of the higher payment would be qualification for the home loan. Lenders limit qualification to a certain amount of one's monthly income. That ratio will vary widely based upon the details of the transaction and type of loan -- amount of down payment, credit score, etc. However; assuming that the person is already at the "limits" of qualification, then the $125 per month would lower the qualification by approximately $25,000 of the total loan amount. This entire analysis is truly an oversimplification, yet it is important to analyze. Homes have been as affordable as they have ever been and a half-of-one percent change will not change that. Keep in mind that we still are not predicting the future of rates. Finally, what about car loans? The change in the cost of owning a car would be much, much less than owning a home. This is because car loans are much smaller than home loans, they are based upon shorter term rates which have not changed as much and are many times offered at discounts as low as 0% in new car promotions. The conclusion? At today's rates, purchasing a car or a home is still a bargain. But depending upon the future of rates, the bargain may not last forever.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com

Rising Rates -- Good News?

Several articles debating the effect of higher interest rates upon the economy have appeared in major periodicals in the past few weeks. The majority of them come to the conclusion that the recent rise in rates represents good news. Not because the higher rates will help the economy. But because of the fact that rates have risen because the economy is doing better. Or at least the threat of a double dip recession has faded from memory. One must remember that it was the threat of things going sour again which caused rates to dive down into uncharted waters. We accept this conclusion; however from this debate arise two additional questions. First, are Americans better off because rates have risen? Our answer is yes -- with a caveat. Americans who own a home and/or stocks are better off because these assets have gone up in value due to the better economy.

 

For Americans without a home, rising rates might make the recent bargains on real estate a distant memory. Which brings up the second question. Will rates continue to rise? At today's rates, home ownership is still a bargain and stocks are a much better place to invest as compared to yields on interest rate bearing instruments such as bank accounts. If rates continue to rise, this equation could change. We would have to predict the future to answer the question -- and we don't have that power. Friday's employment report showed 175,000 jobs created with a slight increase in the unemployment rate. This gives us not much of a clue as to the direction of rates because the report was "middle of the road." However, we will say that perspectives have changed significantly over the past three years. Three years ago, 175,000 jobs created would have been considered good news.

 

Mike Ervin

Senior Mortgage Banker

NMLS# 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com

 

Why Are Rates Rising -- Part Two

Several weeks ago I spoke about the reasons interest rates have been on an uptrend for the most part this year. The first thing I want to make clear is that the reasons have not changed. However, because we experienced a downtrend for a few weeks in the midst of the uptrend, there is reason for additional analysis in this regard. What were these reasons? There were basically three. Rates were bouncing back from ridiculously low levels reached at the end of last year when the economy slowed down and the budget crisis threatened to shut down the government completely. Secondly, the economy seemed to be bouncing back from the pause of late last year. Thirdly, the Federal Reserve Board was making noise about ending their purchases of Mortgage Backed Securities and an ending date for stimulus activity known as Quantitative Easing (QE).

The next question is--why did the rising trend stop? It appeared that the economy was not bouncing back from the pause as quickly as we thought. Weak data included the employment report for March and there was continued negative news from Europe and elsewhere overseas. Now, several weeks of rates drifting back down has been erased in a matter of days in the wake of a stronger employment report for April and continued strong data from the real estate markets. The additional perspective? For one, the employment reports are being watched closely and we have another report which will be released on Friday. Obviously, this report has the ability to turn the markets in either direction with a surprise in the data. Secondly, we can see that rates have become very volatile. Volatility is indicative of a market which has hit bottom. The conclusion? While we can't tell you where rates will go from here, all along we have indicated that record low rates would end and when they do, we will get no warning. My advice is this--don't focus where rates will go, but focus on where rates are. They are still historically low and if you want to borrow money to finance a house, car or business--now is the time to get it done.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com

Fair Market vs. Appraised Value

Some real estate buyers can confuse the fair market value of a property with its appraisal value. However, the two terms are not synonymous. Basically, the fair market value of a property is defined as the highest price a buyer will pay and the lowest amount a seller will receive for a piece of real estate that neither party is obligated to buy or sell. Area demand for real estate also factors into the equation. On the other hand, appraisal value concerns the value of a home as it relates to square footage, condition, and age. In fact the appraisal value of a home is an important aspect of real estate financing as it determines how much a buyer can borrow and if he'll also need to buy private mortgage insurance for the real estate. That's because the appraisal value also determines the loan-to-value ratio or LTV. If the LTV is more than 80%, the borrower will need to buy the insurance. Otherwise, he can forego the coverage. A good lending company can clear up any confusion you may have about values and costs too.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com

Market Whipsaws and Whiplash.

We all know what the term whiplash means when someone gets into a car accident. When we hear the term, we envision a painful neck injury and maybe a neck brace. This term is also often used with the term "whipsaw" when observing the markets. A whipsaw occurs when the market moves erratically in several directions. And if you follow that market, you can get economic whiplash. Now the stock market has not been that erratic as it has steadily moved upward this year with a few days of retrenchment here and there. However, the bond market has been a bit more schizophrenic in its personality this year. For the past few years, the bond market has been a safe haven from volatile markets. The Federal Reserve Board pushed rates down and the struggling economy kept them down.

Anyone who purchased or refinanced a home or bought a car has seen the benefit of low rates in the past few years. And those who put their money into bonds have seen a good steady return for the most part. At the beginning of this year, it appeared that the economy was going to start to roll. Rates then made their first move upward in the past several months. Then came some headlines in Cyprus, the Boston bombing and some weaker economic reports. Rates edged back down to near historic levels. The stronger-than-expected employment report caused rates to move up in short order. That is a lot of movement for a market which still features historically near record lows. On the other hand, it is a lesson to be learned. When rates decide to move upward, there is nothing the Fed can do about it. And we will get no warning

 

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com

Why Are Rates Rising?

Why Are Rates Rising? This is a question that is being asked all across America. For many market analysts, the recent increase in interest rates is no surprise. Why is that?

The Federal Reserve Board has done everything it can in the past five years to keep rates low so that we can heal from our severe recession and slow recovery. It lowered short-term interest rates to zero. The Fed also has purchased hundreds of billions of dollars of Treasury and Mortgage Securities.

The Fed’s plan to keep rates low worked. However, it worked because the economy remained slow and kept threatening to slip back into recession. The latest threats hit last year in the form of a recession in Europe and our own fumbling of the Federal budget – which became known as the fiscal cliff. Rates were higher during the first part of last year before the threat from Europe became severe. As the focus upon Europe eased and the election came and went, the fiscal cliff negotiations — or lack of them — kept the markets on edge. What if the Federal Government shut down? 

Well, this did not happen. So we come into the second quarter of 2013 with the crisis on the back burner and Europe out of the headlines, at least for the time being. The real estate markets are hot and new home sales, resales and prices are rising. A stronger economy translates into less of a need for record low interest rates. What happened in the past year is a function of rates adjusting downward because of fear and now that this fear is removed, rates are adjusting back to where they were. 

A stronger economy translates into more employment and additional good news for many, but it also carries the risk of higher interest rates. We can’t predict what will happen with the economy from here and that is why we can’t predict the future of rates. If you think the economy and the real estate market is going to continue to get stronger, then you also think that rates are going up from here. This means that if you are thinking about purchasing or refinancing a home, you are best to take action sooner than later. A stronger economy brings higher home prices and higher mortgage rates. That relationship is not likely to change.

Mortgage interest rates ended the week about .25% higher than they started. The technical indicators this week show that Mortgage Backed Securities (MBS) are oversold, meaning we should see some MBS market recovery. That's a lot of technical jargon to say that rates should rebound a little bit next week, but only a little bit.

BOTTOM LINE: Overall we are seeing mortgage rates trending up on signs of an improved economy and record stock market performance. There will be some windows of opportunity, but they are becoming fewer and far between. 

 

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com