Oil and Rates

There is an old saying which revolves around the fact that oil and water do not mix. But how about oil and interest rates -- do they mix? The truth is that oil prices and rates have gone lower in tandem this summer. There was a time when the economy could be stopped or started with a change in either energy prices or rates. However, today the effects are not as clear. For example, changes in gas prices don't seem to affect the consumer as much as they did decades ago. There are several reasons for this, but one important factor is the increase in energy efficiencies.

On the other hand, the magnitude of the effect of interest rates does not seem to have lessened, but it is hard to tell with rates remaining so low for the past several years. For example, last year when interest rates started to rise, the real estate market responded by eventually slowing down. Again, the direct effect is not as clear as it always has been. For example, so many in America refinanced at record low rates in the past few years, the rise in rates not only slowed down the pace of refinancing, but also made homeowners more reticent to put their homes on the market. Why leave a home which has such a low mortgage payment? This phenomenon has contributed to a shortage of listings which has in turn contributed to the slowing down of the real estate recovery.

Will the more recent decrease in rates reverse this trend? We really don't think that today's rates are high enough to keep people from selling their house. After all, rates are still close to as low as they have been in our lifetime. What will stimulate real estate is the continued generation of jobs which will increase household growth and a person's confidence to make a move. Job creation may actually cause rates to rise, but as long as the interest rate increases are marginal, they won't keep new households from purchasing their first home or renting a starter home. Meanwhile, lower gas prices and lower rates right now are good news for the economy and should be celebrated while they last.

Mike Ervin
Branch Manager/Mortgage Loan Officer
NMLS: 282715
O: 650.735.5261
C: 650.766.8500

The World is in Focus

There is no doubt that the world has seen more than its share of conflicts this year. We have seen major conflicts in the Ukraine, Iraq, Gaza, Syria, Libya and more. With the amount of turmoil we have seen, the world markets have been pretty solid with our stock market being no exception. By mid-July, the Dow and the S&P were in record territory. In this column we even called it the "Teflon Market" because major news seemed to be shrugged off regularly.

Could this time be different? The Ukrainian crisis has occupied the headlines pretty much all year. Yet, the downing of a civilian airliner has brought the conflict to center stage as many countries, including the U.S., have invoked economic sanctions against Russia because of it's actions in Ukraine. Russia has retaliated with sanctions of their own and now we have an economic cold war in the making. And the markets have reacted negatively to these escalating developments.

Many times analysts have indicated that the stock market is due for a correction as it has been almost three years since the last real correction of at least 10%. Each time we have had a pullback in the past three years the markets have rebounded quickly and this past week we saw at least a moderate rebound. If the Russian crisis escalates, could we be in for a real correction? Only time will tell. However, there is some positive news which has arisen from the stock market's recent international malaise. Long-term rates and oil prices have both headed lower. At a time in which we are receiving positive news with regard to the economic recovery, lower rates and lower oil prices may serve to hasten economic growth. If economic growth accelerates, that is good news for stocks -- but possibly only if rates stay low.

Mike Ervin
Branch Manager/Mortgage Loan Officer
NMLS: 282715
O: 650.735.5261

C: 650.766.8500

Do You Remember Inflation?

 While some may consider this a sarcastic question...we have not had really high inflation in the United States for some time. For example, in the past twenty years the retail inflation rate has averaged approximately 2.25% with an even lower number for the past decade. Two points about this. First, even low inflation rates can cause increases in the cost of living. For example, a 2.25% inflation rate over 20 years will increase the cost of living over 50%. Secondly, though low inflation rates can create issues in the long run, those who are older remember a U.S. inflation rate of near 10% per year from the period of 1973 to 1982. That was real "old fashion" inflation.

So if raging inflation has not been a problem for ten years, why bring it up now? Because the real reason we have had really, really low interest rates for the past ten years is the lack of inflation we have experienced. And if we really want to know when rates are going to go up significantly, we need to watch the data on inflation more closely. The reason rates trend up when we get good economic news is the fact that the markets feel that the Federal Reserve Board will raise short-term rates in response to the threat of inflation.

There are actually two stages here. The Fed has kept short-term rates near zero in response to our deep financial crisis and lackluster recovery. So the first move is to move rates to a low inflation normal. The second move is the one we should worry about in the long-term. That is a move to head off inflationary expectations if the economy heats up. We expect the first move and should worry about the second move. For right now the sale on money to finance cars, houses and investments continues. If we keep creating jobs, we should keep a wary eye on the inflation number because we know the Fed is doing just that when they meet next week.

Mike Ervin
Branch Manager/Mortgage Loan Officer
NMLS: 282715

W.J. Bradley Mortgage Capital, LLC

O: 650.735.5261

C: 650.766.8500