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