The Fed Meeting Finally Arrives

The Federal Reserve Board's Federal Open Market Committee meets today and tomorrow. This is the most anticipated meeting of the Fed in almost a decade. It has been exactly seven years since the Fed moved short-term interest rates to close to zero and it has been over nine years since the Fed actually raised short term rates. Now the markets are expecting the Fed to raise rates from these historically low levels once again.

The Federal Reserve has indicated all along that the markets would get plenty of notice before they raise rates. This notice is designed to prevent market shocks. One must remember that the Fed is only raising short-term rates. For example, the Federal Funds Rate is the rate banks charge each other overnight as they balance their holdings. The other rate controlled by the Fed is the Discount Rate, which is the rate they charge banks for borrowing money. All very short-term. The question is--how can these rates affect long-term rates that consumers pay for loans on cars, homes, credit cards and even student loans?

Some rates, such as credit cards which are pegged to the prime rates charged by banks, may go up instantly. Other loans which are based upon longer term rates such as home loans, are not as easy to predict. That is where the markets come in. The markets react to what the Fed may do before they take action. For example, rates on home loans have risen in anticipation of the Fed's move. Now the markets will listen to what the Fed will say about potential future interest moves. So let's see what the Fed has to say in addition to whether they raise rates. 

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

The Wild Ride Continues

It has been a wild ride for the markets this summer. After a fairly calm beginning of the year which saw moderate gains, stocks have been on a roller coaster ever since. For the most part we have been rolling downhill, but the start of the fourth quarter has been pretty strong. And it is not only stocks gyrating wildly. Oil prices have been even more volatile this year. It is hard to believe that oil prices were in the $110 per barrel range last year. The decrease in oil prices of approximately 60 percent makes the volatility of stocks look like a pebble hitting the ocean.

Of course, several questions arise from what has happened this year. For one, will the gyrations continue? With regard to oil prices, the prevailing opinion is yes. We have a global economic slowdown at the same time Iranian oil is getting ready to hit the market. In years past, OPEC just throttled back production to keep oil prices stable. But this year they seem to be intent on hurting the U.S. shale oil business by supporting lower prices. On the other side of the coin, Russia's involvement in the Middle East is throwing more fuel on a fire and this is causing oil to rebound in the short run.

The next question is--how do these gyrations factor into the Fed's thinking as the Federal Reserve Board's Open Market Committee meets next week and in December with only these two meetings remaining to meet their own prediction of raising rates sometime this year. As we have said before, the Fed does not like uncertainty. The weak September jobs report adds to this uncertainty and this is why the markets feel that the Fed will pass on rate increases, at least for October. If they do raise rates, it would surprise the markets and this would go against the Fed's goal of making sure the markets are prepared for their next move. And that surprise would cause more volatility.

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

Listening to the Fed's Words

Forget about what the Federal Reserve Board did not do for a minute. Let's talk about what they said. With the Fed, it is usually more likely that their words will be more important than their actions, or lack of action. This has been a very turbulent end of the summer for the markets. Above all, the Fed is interested in restoring calm and especially making sure that their actions do not add to the instability of the markets. And we certainly have had some unstable markets during the past several weeks.


This is exactly why we were expecting "calming words" from the Fed when they made their announcement. Did we get these words? Absolutely. The Fed said that "recent global economic and financial developments may restrain economic activity somewhat." Two things are important about this statement. First, it is softened by using the word "somewhat," meaning the Fed does not see a risk of a world-wide economic meltdown. Secondly, the Fed used the words "international or global" more than once. The international issues broaden the scope of the Fed's focus from just looking at our jobs or inflation numbers.

Bottom line is that the Fed did not raise rates, though they did leave that option open for their last two meetings of the year in October and December. That is good news for the markets and the consumer. The stock market has already been under pressure lately and it did not need the extra pressure of a rate hike. And rates on home loans are likely to stay low in light of the Fed's decision. We can't think of better news for the consumer right now.   

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

How About Some Perspective?

Last week we talked about how times can change from week-to-week. With regards to the somewhat "disappointing" jobs report released recently, we have to reach back almost a decade to understand how our perspective changes over time. The economy lost approximately 8.7 million jobs during the Great Recession of 2007 to 2009. Since that time, the economy has added over 11 million jobs. The unemployment rate peaked at 10.0% in October of 2009. It currently stands at 5.1%, near the 4.5% bottom it hit before the recession took place.

Keep in mind that this does not mean we have recovered completely. During this time the country has added tens of millions to our population and therefore we have not recovered all jobs lost. Why is this perspective important? Because the Federal Reserve Board will be considering long term trends when they make a decision regarding raising rates this week. Yes, the latest report is important, but not as important as where we are headed. And therein lies the problem. The Fed can't predict where we are headed either. For that the Fed would need a crystal ball and they don't have one of those.

Certainly, the gyrations of the stock market will be considered by the Fed. And not only our stock market, but markets all over the world and especially in China. Is our market correction due to the possibility of the Fed raising rates or the fear of an economic slowdown spreading to our shores from overseas? One trend should be noted: short-term rates have risen during the past several weeks and this tells us that the markets are expecting some action from the Fed. Though short-term rates are not as "visible" to the consumer as longer-term rates that determine the value of fixed rate home loans, short-term rates do determine adjustments for those having variable rate home loans and this trend bears watching.


Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

My How Times Change

You may be thinking that we are talking about how the world has changed over the years. For example, who would have thought that a conversation with our children would most likely occur through texting on a machine that many of us did not even grow up with years ago? Here we are talking about how things change from week-to-week. During the past few weeks we have been illustrating factors before and against a rate increase orchestrated by the Federal Reserve Board, whose "Open Market Committee" meets next week.

On the plus side we had a strengthening economy and the creation of jobs. On the negative side we had a correcting stock market, a stronger dollar, a slowing economy overseas and plunging oil prices. In just a couple of days, the stock market rebounded significantly, we had a significant upward revision in the estimate for our economic growth in the second quarter and oil prices rebounded sharply as well. In a matter of a few days, we went from not at all expecting a rate increase to thinking that a rate increase could happen. Just to make things interesting, a few days later, stocks and oil prices reversed again. If you are confused, think how the Fed must feel considering this decision.

And then came the jobs report. What did the jobs report tell us? Even though the addition of 173,000 jobs was less than expected, the unemployment rate dropped to 5.1%, the previous month number of jobs added was revised upward and wages grew a bit more than predicted. Overall, this report is a positive one for the economy and, therefore, increases the chance of a rate increase next week. Most analysts are putting the chances of an increase at 50-50 right now. Though, one thing we can tell you is that the Fed does not like major uncertainty. And there is plenty of uncertainty out there right now. Too much uncertainty may be the overriding factor determining the results of this decision.

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

Lower Gas Prices on the Way?

Even before the Iran deal was announced, market analysts were predicting that lower gas prices were on the horizon. Certainly, the optimism over the Iran deal has increased this speculation. In reality, the deal might help more Iranian oil get to western markets, yet we know that this agreement still has to go through the "political process." That does not stop optimism, and CNN/Money recently published a story saying that we could see gas prices at $2.00 per gallon, especially after the summer driving season comes to an end.

Again, even without the deal being implemented, analysts were bullish on lower gas prices as world production was rising. The next question is--will that hurt or help our economy? On the plus side, lower gas prices should bolster consumer spending, while lowering the threat of inflation. This could help moderate future rate increases. On the negative side, our energy sector would be negatively affected and areas dependent upon those sectors would be hurting as well.

The overall effect would definitely be positive. We should remember that the energy sector affects all industries. There has even been a recent study that has indicated that falling gas prices can shorten the time it takes a house to sell and can increase the selling price. The study was published by Florida Atlantic University and Longwood University. We certainly understand that lower gas prices can affect demographics with more moving closer to cities when gas prices are higher. Will gas prices fall and by how much? That remains to be seen but the possibility is intriguing. 

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

Is a Correction Coming?

We are approaching almost three years since the last time the stock market underwent a classic correction, which is generally defined as a pullback of at least 10 percent. According to CNN/Money, a correction happens on the average of about every 18 months. Thus, statistically we are more than due at the present time. Note that we are not talking about the end of the bull market which has lasted over six years. The question is: will this correction come in the second half of the year?

For the first half of this year, the stock market has treaded water. This is in contrast to the rest of the bull market in which gains have averaged close to 15% annually for the previous six years. One could argue that this "breather" is a correction, even though there is not a classic loss in value. Another question follows: Why would stocks be stagnating when the economy is picking up steam? Right now there are two factors holding back stocks -- higher rates and international pressures, most recently the crisis in Greece. It is not surprising that stocks are weak in light of the issues Greece and Europe are facing. Interest rates and oil prices have also fallen as the crisis has unfolded.


As for rates, stocks have long benefited from super low rates. Now that rates may be rising in the long run due to a better economy, that benefit may be reduced. Of course, it is not like rates are high right now, especially from a historical perspective. Just keep in mind that rising rates do not affect only the real estate sector. They can have a profound influence on all markets. Right now rising rates are actually benefiting real estate as consumers rush to purchase homes to beat the rate increases.  

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

End of the Quarter

The quarter just ended and it was a very important quarter for the American economy. Especially considering the fact that last quarter was weak due to our long and harsh winter and international economies are slowing. Economists will be looking for a bounce back from the first quarter in which the economy actually contracted. And the first important statistic wrapping up the quarter was reported this past week -- the jobs report. The employment numbers give us a clue as to how we did in the second quarter. Certainly at lowest unemployment rate in seven years is an indication of good news.

Because the numbers were moderately strong, this means that the quarter is likely to have been strong as well. The question is, does that puts us closer to an increase in rates courtesy of the Federal Reserve Board? As we have previously indicated, the Fed is also watching for increases in wages and wage inflation continues to be muted. While higher wages are great for the economy, they also would represent the first spark in inflation. Strong jobs and a rebounding real estate market are hallmarks of the better economy the Fed is looking for. There is no doubt that the real estate markets are getting stronger.

The end of the quarter also means that we are going to see a slew of earnings reports. The stock market often reacts to these reports and if corporate earnings falter, many are expecting to see the stock market correction that we have avoided for quite some time. Mix in international influences and the situation can get very cloudy. Just this past week we have seen how the Greek crisis and China's stock market crash affected movements in our
stock market as well as interest rates. This is why predicting the future is so difficult -- for us and the Fed.

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500
mike@mikeervin.com

More On The Fed

As we have discussed, the Federal Reserve Board is moving closer to raising interest rates. We have mentioned several times that the Fed controls short-term rates directly and influences, but does not control, longer-term rates. This topic is important to understand as we watch the economy this year. The Fed sets the "Discount Rate" which the Fed charges member banks to borrow funds in the short run when they are short of reserves. The Fed also sets a target for the "Federal Funds Rate" which is the rate banks charge each other for short-term borrowing.

Without getting into too much technical detail, these are very short-term rates. Thus, when the Fed moved both rates to near zero as a reaction to the recession, rates on short-term instruments, such as six month treasuries, moved close to zero as well. Long-term rates moved down as well in reaction to the same forces that caused the Fed to lower short-term rates. Why is this important? This is important because the Fed is likely to increase short-term rates shortly.

And many are thinking that long-term rates, such as rates on home loans, will move up automatically. Well, rates on home loans have already moved up from their low levels of this winter in anticipation of this move. Therefore, when the Fed moves rates up, if the markets feel that this is the only move coming for the foreseeable future, long-term rates may not move at all. On the other hand, if the economy keeps getting stronger, long term rates will continue to move up regardless of what the Fed does. As a matter of fact, if the markets feel the Fed is not moving quickly enough, rates could move up even faster because nothing spooks the markets more than the specter of inflation.

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500
mike@mikeervin.com

The Inflation Factor

 
When the Fed does act to raise interest rates to prevent inflation, this is important to our economy. We have been suffering through a recession and tepid recovery for so long, many have forgotten that the Federal Reserve Board's overriding purpose is to use monetary policy to protect us against inflation. In reality, inflation has not been a major factor in our economy for decades. The annual inflation rate in the United States has exceeded 3.0% only five times since 1991 and has not been over 4.0% during this same period of time.

This is not to say that lower levels of inflation do not affect our citizens. For example, if inflation averages 2.5% per year (a bit higher than the Fed's current inflation target), prices will double in 28 years. That may seem like a long time, but consider this. If you bought a home of $300,000 today and the home increases in value at a 2.5% annual rate, it will be worth over $600,000 when the loan is paid off.

Likewise, if someone is paying $2,000 in rent today and the same rate of inflation is applied, their rent would rise to more than $4,000 in 30 years. Thus, the cumulative effect of inflation is significant even when the rate of inflation is low. And even when the general rate of inflation is low, certain areas exceed the general rate. For example, the rate of rent inflation has exceeded the general rate of inflation for the past several years. This has made it difficult for renters to afford housing while those who own are not subject to the same increased inflationary factors.  

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500
mike@mikeervin.com

Rates Are Still Low

Sometimes we lose our perspective. While rates on home loans have been increasing for the past few weeks, if you read the headlines, it seems like rates are really high right now. They are not. According to the Freddie Mac survey of home loans, the 30-year fixed loan averaged over 5.0% every year from 1975 until 2010, a period of 35 years. That is a generation in which rates have averaged over 7.0% in the long haul.

It is only since the financial crisis hit that rates averaged below 5.0% and for the past five years, the average has been a little over 4.0%. Yes, there were a few periods where rates dropped below 4.0%, including early this year. However, when you look at the difference between 7.0% and 4.0%, rates are over 40% below where they have been historically. This is why renting is more expensive than owning right now in most areas of the country.

There is another message here that we have been delivering for a while. These low rates are not expected to last forever. Every time rates increase as they have in the past few weeks, we ask ourselves--is this the end of the super low rates? We hope not. However, we keep cautioning our readers that rates are great right now and if you are thinking about purchasing a home, refinancing or even purchasing a car, now is an excellent time. You never know when this sale on money will end.

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500
mike@mikeervin.com

Lifting Others Up

Almost a decade ago the first salvos of the subprime mortgage crisis were being felt. We know now that what started in our real estate sector spread not only to our entire economy, but to great swaths of the world as well. It was as if we pulled the world into recession. As the world's largest economy, it is not surprising that as we sunk, we took much of the world with us.

Now that our economy is recovering, the world is still languishing in many areas. The question is -- can we now lift the world out of recession? We think that it is logical that this could happen. However, there is one factor which must be in place -- our real estate market must be clearly recovered. The real estate markets led us into recession, and now they must lead us to prosperity.

This is why the monthly real estate data being released is so important. Last week we had existing and new home sales data released and the results were mixed, but the more important existing home sales figure was positive. This represents a decent start to the spring selling season. We are not saying that the jobs report next week will not be watched closely. The jobs numbers are very, very important. But employment will not keep improving without help from the real estate sector. The Federal Reserve Board is meeting as we release this newsletter and you can be sure the real estate sector will be on their mind as they prognosticate about the next employment report to be released next week.

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

So, How Was It?

With all the buildup we gave the March unemployment report, the next question is...how was it? Was it really as important a release as we have described? Generally, the jobs data is very important, but this report had the potential for real impact coming on the heels of six months of strong jobs data and being released two weeks after the Federal Reserve Board's Open Market Committee considered how quickly they should raise short-term interest rates.

The result was good news with regard to the upcoming rise in interest rates in the form of bad news from the labor sector. The increase of 126,000 jobs was just about half of what was predicted by economist ahead of time. In addition, the previous two months of data were revised down by almost 70,000 jobs. The unemployment rate remained steady at 5.5%. In response to the weak report, market analysts seem to be pointing their fingers at the bad weather we experienced in February, as well as layoffs in the energy sector, by way of explanation.

We will note that one soft month does not indicate a trend, especially during a rough winter month and with data that is often revised the following month. But the results will give the Fed some hesitation. What could save us from an imminent rate hike even if this report was a one month anomaly? A strong dollar and low oil prices both lower the threat of inflation. In addition, wage inflation, which remains muted for now, is as important as the number of jobs we create. The key is inflation, or more precisely, the lack of it. 

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

A Crucial Employment Report

Every month the employment report is very, very important. The creation of jobs not only tells us how the economy is performing, the report also tells us how the economy will be performing in the future. When we create a significant number of jobs, we know that these jobs will create more jobs because those who have become employed will spend more money on a variety of goods.

This week, we feel that the March employment report is even more important than usual. Why? For one, after the creation of almost 300,000 jobs per month over the past six months, we know that the Federal Reserve Board is getting closer to raising short-term interest rates. Any number close to 300,000 this month may move the Fed to a tipping point. In their most recent meeting the Fed removed the word patience from their guidance but at the same time, indicated that they will not be "impatient."

Secondly, we are looking at another number besides the number of jobs created. We are looking at those who have removed themselves from the labor force as a result of the recession. If some of these folks start coming back into the labor force, the unemployment rate could increase or at least stay the same even with a significant number of jobs created. If the economy produces a plethora of jobs and the unemployment number stays steady or rises, this would actually be good news. It means that our economic recovery is finally starting to reach mainstream America. The low labor force participation rate is one reason the Fed has been able to hold off raising rates for so long into the recovery. It is also one reason that wages have not risen as jobs have been created. Hopefully, this will soon change.


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

We Have Hit Bottom........

It is not often that I go out on a limb and make a prediction about the future. That is because if I could predict the future, I would be on a 200 foot yacht in the Greek Islands. However, sometimes I just can't resist. What bottom am I predicting? The rate of home ownership in America. It has been falling for nearly a decade and in the fourth quarter of 2014, it hit the lowest level in over two decades at 63.9 percent, according to the National Association of Realtors.

The peak for the home ownership rate was just under 70% during the real estate boom. Why is it going up from here? There is a few reasons. For one, it is getting easier to own a home because credit standards are lower. Secondly, the cost of renting keeps going up and it just makes more economic sense to own. When renting is more expensive than owning, before the benefits of tax deductions and the forced savings of principal reduction are taken into account, then the economic message can't be ignored.

The most important reason? The time is right. More jobs are being created and that means the rate of household formation is increasing. A report recently issued by the Lusk Center For Real Estate at the University of Southern California indicates that we are now at pre-recessions levels of household formulations. That means that the Millennials are moving out and they will need places to live. The first quarter of 2015 statistics have not been released yet, but we think I are at or near the bottom and the rate of ownership will rise from here unless there is a major intervening economic variable. 


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

The Jobs Report Surprises Again....

Daylight Savings Time is the official start of the spring real estate selling season. With the weather the mid and east coast had during February, I am sure this early rite of spring caught many by surprise. But in my experience I know that things can heat up quickly. The markets will be monitoring how busy traffic is at open houses, builder sites and more when people are able to go out and drive again in certain areas of the country.

Of course, the markets are also monitoring the jobs data closely as well. The jobs data has been so strong lately that analysts now seem to be expecting around 250,000 jobs to be added each month. In February, the numbers did not disappoint these prognosticators, as the economy added just under 300,000 jobs for the month. The unemployment rate slipped to 5.5% from 5.7%, which was also better news than forecasted.

There were some aspects of the report which were considered not as strong. For one, the rise in hourly earnings was disappointing. This is good news with a meeting of the Federal Reserve Board coming up next week. The Fed will be considering the issue of raising rates and the lack of wage inflation takes some pressure off. Of course, this is bad news for workers. Also on the weaker side was the drop in the labor force participation rate. Some are theorizing that the bad weather in February may have discouraged some from coming back into the labor force. Bottom line, the economy continues to improve. Now how about that weather west coast.....

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

Is it Spring & Jobs Report Time Already?

It sure doesn't feel like spring on the east coast. However, our calendar tells us that it is March and this week we have two important events -- Daylight Saving Time starts this week, which means we must turn our clocks forward and we have another jobs report being released. It seems like we just had a jobs report to comment on, but we must remember that February is a short month.

The jobs data has been so strong lately, our guess is that projections are starting to creep up. There was a time not long ago in which 200,000 jobs added was considered a fantastic month. Now 200,000 may be considered a disappointment. If we continue to add jobs at the rate of 250,000 per month, it is possible that the Federal Reserve Board will raise short term rates more quickly than anticipated.

Evidence the fact that rates moved up significantly during the week of the last jobs report. The move was not enough to shake the markets nor enough to deter consumers from purchasing homes. However, that does not mean another strong report could not move rates up another notch. The real estate data released in the past week was not especially strong with existing sales slightly lower than expectations and new home sales slightly higher than expectations. Even though the data was not strong, the numbers continued to be improved on a year-over-year basis -- thus the market is moving in the right direction and the very strong pending home sales numbers released on Friday confirms that assessment.  

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

The Surging Dollar

In the past few months, we have focused upon many factors affecting the economy. These have included low oil prices and interest rates. The same international economic and political factors which have pushed rates and energy prices lower and contributed to volatility in the stock market, also have caused the U.S. Dollar to surge to levels not seen for years.

There are many positives associated with a stronger dollar. For one, our dollar is strong because our economy right now is stronger than many other countries, especially Europe. In addition, a stronger dollar makes imports and travel cheaper, which lowers the threat of inflation and helps keep our interests rates low. However, there is a negative side of a strong dollar. Because our exports become more expensive to foreign nations, it can slow our economy and cost us jobs.

Like everything in life, each economic factor creates balances. If our economy is stronger than others, the stronger dollar can bring it down a notch. Here is the good news. With low oil prices and interest rates, the consumer has a chance to be an economic star in 2015. The creation of more jobs and low rates could very well turn into great news for the real estate market in 2015 and thus offset the negative effects of a stronger dollar. Meanwhile, it is a good time to book a hotel room in Europe and many other places.  

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

Have We Hit Bottom?

Usually, when we hear that someone or something has "hit bottom" -- that is a good thing, because the only direction that person or thing can go from there is up. On the other hand, if we are talking about oil prices and interest rates, hitting a bottom might not be considered a good thing. For example, if you were looking for gas prices to hit $2.50 per gallon, they are not going near that price if we have indeed already hit bottom.

Indeed, there is some evidence that oil prices bottomed around $45 per barrel. We are not surprised by the fact that oil prices rebounded to the $50 per barrel range because they had fallen so far and so fast. Often markets overshoot the fundamentals and come back to be in balance. Are oil prices going back to $100 per barrel? We have no idea because we can't predict the future. However, most likely the price will settle somewhere in between $45 and $100 without some major intervening economic or political variable.

Interest rates too have been falling for the past few months. Not as precipitously as oil, but one must remember that rates were already very low. The fact that rates went back to the record low levels hit two years ago, was quite extraordinary and certainly not predicted. Like oil, we are not surprised that rates have rebounded somewhat. If a few weeks ago was the bottom, there will likely be a rush of those who waited too long. When homeowners and buyers realize that, we expect there to be lines forming to refinance or purchase a home. The question is -- is there still time to get in front of the line?


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

The Employment Report is Released

For the first part of the year, the focus has been international news, rather than domestic economic reports. Not that we have not had our share of news, including the first meeting of the year for the Federal Reserve Board's Federal Open Market Committee (FOMC). The statement from the committee indicated some of the same emphasis on international news.

This news has included increased economic stimulus in Europe where the economies continue to struggle. The stronger dollar and low price of oil are also affecting overseas economies -- as well as our own economy. It is unlikely that our interest rates would not be so low without the world-wide economies continuing to languish. The question is, will our economy continue to thrive through all of this world-wide economic and political turmoil?

Thus, January's reading of the jobs situation released on Friday was all-important in this regard. What did the data show? It showed that our economy is continuing to strengthen as the world slows down. More jobs were created than expected, the previous months were revised even higher than originally reported and hourly earnings showed a healthy jump. Even the higher unemployment rate was seen as a positive as this was due to more job seekers entering the market. Any increase in the labor participation rate is viewed as a sign of an increasingly confident consumer.

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

First Data of 2015

This week we will see the first release of economic performance in 2015. Not only is it the first data release, but also the most important release of all. It is the jobs report for January. There will be a series of releases on the employment situation this week, but the most significant number is Friday's jobs report. Why do jobs represent the most important data?

The creation of jobs fuels the economy. People with jobs spend more money. The money they spend creates other jobs. For example, if they purchase a car, it creates manufacturing jobs. If they purchase a new home, it creates constructions jobs. That does not even count jobs for real estate agents, loan officers, appliance manufacturers and several other sectors connected with the housing industry. As a matter of fact, the real estate industry is the best example of the effects of job creation.

The National Association of Home Builders has stated that the construction of 1,000 homes creates approximately 3,000 jobs. When people buy homes, it creates jobs and then these people can also purchase homes. Thus, if you want to see how real estate will do this year, watch the jobs report. Last year was the best year for job creation in over a decade. Let's hope the good news continues in this regard.

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

January Been a Wild Ride

In the past two weeks we have gone over a review of 2014 and also presented some predictions from economists for 2015. However, no one could have predicted the wild ride the markets would have in January. In early January, after just a few days, we looked like we were headed into the long-awaited stock market correction. It took only a few more days of strong rallies to ease those thoughts for a few days, and then the markets reversed course again.
Oil prices are down substantially. And while that may hurt some foreign countries, some stocks and certainly the oil industry, it helps the average consumer. If you consider the peak of oil in 2014, the cost to fill up your car has been almost cut in half. That is a lot of savings. Long-term interest rates are also down which translates into more savings for the consumer. For example, by mid-January rates on home loans were the lowest in more than 18 months. More and more consumers are refinancing home loans and garnering major savings.
Lower oil prices and lower rates? The economy must be really hurting. Yet, the December jobs gains tell us that the opposite is true. We just finished a year in which the economy added almost three million jobs, the best year since 1999. On the face of it, rates should be increasing when economic growth picks up. There are many factors holding rates down and most of them are international. The economies in Europe, Russia and in many other countries are not strong. One must remember that we are now in a world economy. Even our growth is uneven with certain states faring better than others and the world is the same way. For our citizens in general, it is a win-win situation.

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

Unbridled Optimism

We move into 2015 with a flurry of projections to analyze. If we could summarize these projections using one word, that word would be -- optimism. The predictions for the most part seem to be optimistic with regard to economic growth for the next year and that includes the real estate markets which actually lagged the overall economy last year. Here are a few samples of the words used by these prognosticators---

• "The U.S. economic outlook looks brighter, with growth likely to be somewhat above the trend of the past five years," New York Fed President William Dudley;
• "Many of the gains that we recently predicted in the realtor.com® 2015 Housing Forecast are built on housing growth established in 2014,”  Jonathan Smoke, realtor.com®’s chief economist;
• "The housing market is likely to continue its gradual climb upward next year after a sub-par 2014. We anticipate a fairly strong increase in housing starts in response to stronger employment and some improvement in related household incomes," Fannie Mae Chief Economist Doug Duncan.

Before we jump on the bandwagon, we must remember that no one can predict the future. As a matter of fact, we had similarly robust predictions about growth in 2014 at the end of 2013. The severe winter of 2013-2014 put a wrench in those predictions. Usually, predictions are based upon what is happening right now. The fact that the U.S. economy grew by 5.0% in the third quarter gives us optimism for 2015. So did the pace of job creation in November. Thus, December's job's numbers became important with regard to momentum going into the year and the numbers did not disappoint. The 252,000 jobs capped a year in which we added very close to three million jobs, which is the most in 15 years. Thus, not just optimism, but unbridled optimism. 

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

Looking Back

Next week we will spend some time sharing predictions for 2015. But first we want to take a look back and see what happened in 2014. We started the year with a severe winter and a slowdown within the economic sector. We ended the year on an upswing best exemplified by the recently revised estimate for economic growth in the third quarter. The five percent growth rate was the strongest in over a decade. Though we are not expecting that the number for the last quarter of the year will come in at that level, there is also no evidence of a sharp slowdown in the rate of growth for the last quarter of the year.

Employment growth picked up nicely in 2014. Well over two million jobs were created last year and the unemployment rate dropped almost one percent to below six percent with December's numbers still to be released. Inflation stayed tame this year and wage growth did not pick up significantly -- thus all was not a bed of roses with regard to the employment sector. On the other hand, the low inflation rate enabled mortgage rates to stay low throughout 2014 and oil prices dropped significantly, especially in the second half of the year.

Meanwhile, the growth in the real estate market slowed somewhat in 2014. The pace of real estate sales leveled off and price gains were more moderate that the previous two years. As we have emphasized, the adjustments in the real estate sector are mainly related to the drop in distressed sales, which is actually a sign of normalization. Finally, the stock market was volatile but marched upward for most of the year as the bull market continued. This year's gains of over ten percent for the S&P Index has contributed to a gain of well over seventy percent during the past five years -- completing the stock recovery from the financial crisis lows of March of 2009. To illustrate, the Dow closed at a low of 6,547 in March of 2009 and finished 2014 close to 18,000, which now represents the fourth longest bull market in history while the drop in crude oil and Europe's faltering economy have helped drive down mortgage rates to the lowest levels in 18 months.

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