The Deed is Done

The Federal Reserve Board has spoken. The increase of .25% in short-term interest rates surprised absolutely nobody. However, the markets did not like the statement accompanying the increase which alluded to as much as three rate hikes in 2017. Of course, last year they talked about the same thing and we had only one due to several factors. Of course, this year we also have had the "election effect" on the bond market, which means that rates were already moving higher before the move.

When the markets are skittish, any hawkish statement by the Fed was likely to make the markets more volatile, which is exactly what happened. We actually believe that the markets could have reacted poorly if the Fed did not increase rates. This is because the economy has shown enough strength to convince the markets that keeping rates at artificially low levels was no longer necessary. We must remember that the Fed controls short-term rates directly and long-term rates only indirectly. If the markets feel the Fed is being soft against the threat of inflation, the markets will act on their own in this regard.


So, what is the bottom line, now that the deed has been done? The Fed's announcement after the increase tells us that they are satisfied with the direction of the economy. When the Fed raises rates because the economy is getting stronger, this is certainly good news. The markets are showing further optimism based upon the possibility of new economic policies expected to be implemented by the new Administration. If this optimism turns out to be right, we will see more rate increases in the coming year, which coincides with Chairperson Yellen's statement. Again, this represents good news for the average American and the housing markets, because more jobs will be created. That would be quite a feat since the economy added over 2 million jobs again this year.

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

Thanksgiving

Thanksgiving arrives this week. Every year, this is the day we reserve for giving thanks. Certainly, in our country we have much to be thankful for. We are one of the richest countries of the world when you measure by per-capita income, and perhaps the richest when you measure per-capita income against the size of our population. But it is not all about riches. It is also about our freedom and democracy. Yes, the recent political campaign turned a lot of people off, but how many would opt for the alternative of not having the right to vote? 

On the other hand, it is easy to look at the aggregate numbers and forget that these averages can hide the millions who are not as fortunate residing right in our own country. And certainly, Thanksgiving is the time that our focus upon charity is also renewed. What makes our country great is not only our riches, but also that we are a leader with regard to charitable giving as well. Thus, we hope everyone will take some time to share, donate or volunteer during Thanksgiving week.

As important as Thanksgiving is, the economy marches on in the wake of the election and with an important meeting of the Federal Reserve Board's Open Market Committee meeting coming in December. The recent spike in long-term interest rates has been concerning for many market watchers, especially since this spike is accompanied by concern that inflation will be on the rise. The question is whether this rise in rates is an overreaction to the surprise result of the election, or are their more fundamental long-term changes coming our way? This will be a topic we will analyze during the coming weeks.

Are Americans Addicted to Low Rates?

You can't read or watch the news and not view a story about some type of addiction in America -- whether it is common substances such as caffeine, legal prescription drugs such as pain killers, or illicit drugs such as heroin. But today, we ask a question about addictions and our economy. Are we hooked on low interest rates? Perhaps we are using too strong a word to describe the situation, but it seems like we have gotten pretty used to historically low rates during our economy recovery.

Why do we think that we are getting too used to low rates? For one, every time there is talk of the Federal Reserve Board raising rates from these ridiculously low levels, the markets react significantly. Keep in mind that we are talking about raising rates slightly from close to zero. Of course, most Americans don't really recognize the Fed's Federal Funds Rate. But if you look at something they are familiar with, such as rates on home loans, we can see the issue more clearly. Rates on home loans averaged over 7.5% for a generation from 1980 until 2010, a period of 30 years. Now rates have averaged around 4.0% for the past few years.

What happens if rates move up in the future? Will people stop buying homes? If someone is paying 4.0% on their home loan, higher rates would make them more reticent to sell their home in the future unless there is a major life change such as marriage, relocation or retirement. And certainly, they would be more reticent to refinance as well. Thus, if rates are going to rise from these unbelievably low levels, they would have to rise gradually such as not to have a significant affect upon the economy. The Federal Reserve Board will have to be very cognizant of these possibilities as they consider their future moves.

Mike Ervin
NMLS # 282715

mike@mikeervin.com
www.mikeervin.com
(650) 409-8794 Direct

(650) 766-8500 Cell

Corporate Profits

Recently we have been discussing a variety of factors affecting the markets. These factors have included oil prices, the international economy, terrorism, inflation, job growth and more. When there are so many other important things going on around us, sometimes we neglect to focus upon factors which are not a major explosion, but give us a good reading as to the direction of the economy and the markets. That is why this week we are talking about corporate profits.


Our first quarter has ended and major companies have been reporting their profits for several days now. Corporate earnings growth fell throughout 2015. It is no coincidence that the stock market rally stalled last year and interest rates stayed lower than we expected. Stocks were volatile in the first quarter of this year, but by the end of the quarter, things were pretty much where they were for the past year -- which is flat. And rates are still lower than expected.


Certainly corporate profits are a function of the economy and we expect a stronger economy to boost profits. Thus, the first quarter's earnings reports are being watched carefully in this regard. The price of commodities, especially oil, has really hurt profits in the energy sector. You can see how inflation, the economy and all of these factors are intertwined. Thus when the Fed meets next week, they will also have a fresh batch of data in the form of earnings reports. And if these reports continue to be weak, there will be less chance of a rate increase. It is not the only factor, but certainly one to watch this month.

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

Will the Fed Increase Rates Next Week?

The numbers are in and it looks like the world financial situation is not affecting our economy's job creation. This gives the Federal Reserve Board food for thought going into their meeting next week. As we indicated earlier, many analysts originally thought this would be the month the Fed raised rates again, but market volatility and international concerns tempered these thoughts.

The economic news leading up to the jobs report was pretty solid as well. There was an upward adjustment in the measure of the fourth quarter's economic growth and solid growth in orders for durable goods, existing home sales, personal income and consumer spending. Not all the news was positive, as new home sales faltered, but new home sales were coming off a month in which we saw a very large increase in sales.

All in all, the increase in jobs of 240,000 shows that the economy is continuing to move forward, which means that we are moving towards another rate increase by the Fed. Looking at the big picture, the stock market's recent rally and the rebound in oil prices are all giving us the same indication. However, that does not mean that the Fed will definitely be increasing rates when they meet next week, especially considering the fact that the increase in wage growth was tame. But certainly, it puts such an increase back on the table.

Mike Ervin
NMLS # 282715
W.J. Bradley Mortgage
mike@mikeervin.com
www.mikeervin.com
P: (650) 451-7797
C: (650) 766-8500

Another Important Jobs Report

Every month watching the release of the employment data is interesting. However, with the Federal Reserve Meeting coming up in just a few weeks, the jobs report will take on a special meaning. It has been a tumultuous start to the year with stocks, oil prices and interest rates moving lower in tandem. Before the year started, many were predicting the first rate increase of the year by the Fed at the March meeting. Now most analysts have changed their tune in this regard.

We should not assume that the Fed has changed their mind. We have already seen stocks trying to rally and a pick-up in consumer inflation for the first time in a while. Add a strong jobs report to the mix, and the speculation about the Fed will start up again. That does not necessarily mean that the Fed will raise rates in March, but even a strong statement about the health of the economy might be enough to affect the markets.

One thing is for sure -- the markets are always changing and the changes can come quite rapidly. Thus, we should not take it for granted that stocks are going to have a down year and interest rates are going to hover at record lows all year. This means the markets will be watching the jobs report closely for any evidence that the economy is still producing enough jobs per month in order to put upward pressure on wages.

Mike Ervin
NMLS # 282715
W.J. Bradley Mortgage
mike@mikeervin.com
www.mikeervin.com
P: (650) 451-7797
C: (650) 766-8500

Some are enjoying the sale

While many are not too happy about the stock market retrenching and others who work in the energy industry are suffering through a retrenching, much of America is enjoying the sale going on right now. What is on sale? Gasoline and home loans. If these gas prices hold, we would expect a very busy summer vacation season and this should boost the economy. The American Automobile Association has indicated that the price of gas is now averaging over $1.00 per gallon less than the highs hit in 2015.

Lower than expected rates on home loans are fueling an increase in refinancing by homeowners. In mid-February, the share of applications for home loans which were refinances hit over 60% of the total market. Refinancing also puts more cash in consumers' pockets. With the spring real estate season about to start, it remains to be seen whether low rates will also boost home sales. We will add our own speculation.

We believe that if the economy continues to produce jobs near the same rate it did in 2015, and if rates stay low, this could be a banner year for real estate. The only issue holding back real estate sales is the lack of inventory. We expect builders to ramp up to meet the demand produced. The bottom line is that owning is cheaper than renting in most areas of the country and the sale on home loans has made homeownership even more affordable.

Mike Ervin
NMLS # 282715
W.J. Bradley Mortgage mike@mikeervin.com
www.mikeervin.com
P: (650) 451-7797
C: (650) 766-8500

Is The Stock Correction The Fed's Fault?

Stocks have had a rough start to the year and many analysts are blaming it on a slowing economy, especially in other parts of the world. We think that the Federal Reserve Board deserves some of the credit for the weakness in stocks. We are not saying the Fed was not justified in raising rates. However, it is likely that some investors involved in the equities market must have come to the realization that the party might be over when it comes to borrowing at such low short-term rates.

Did the Fed react too quickly with regard to moving rates up? It is hard to fathom this since they left rates so low for so long. And they warned us for a year that the rate increase was coming. Still, we do get the impression that the bad news around the world could have swayed the Fed to wait another few months. It was almost as if they had said that rates were going up "this year" so many times, they only had one more chance and that was the December meeting.

On the other hand, the last jobs report moved our unemployment rate to 4.9%, which is the lowest in eight years. The economy produced 150,000 jobs in January and still the markets were disappointed in the number. The news on job creation is evidence which supports the action by the Fed to move rates upward, even if ever so slightly. Though the stock market may be reacting to the world-wide economic slowdown, there is also more than just a small possibility that the specter of higher short-term rates also is factoring into the equation. 

Mike Ervin
NMLS # 282715
W.J. Bradley Mortgage mike@mikeervin.com
www.mikeervin.com
(650) 451-7797
(650) 766-8500

The Bright Side of Weak Stocks

We are not saying that the stock market is not going to recover quickly from the correction it has undergone during the past several weeks. Nor are we rooting for stocks to languish this year. However, we always find that when there is bad news, there is most likely counter-balancing news somewhere else. In the case of a weak stock market, we have seen some of these effects.

For one, interest rates are lower than anyone expected at the start of this year. As we pointed out previously, the weak stock market has made many observers predict that the Federal Reserve Board will be more reticent to raise rates again any time soon. And this is not just because of the stock market, but the factors which are causing stocks to be weak, such as oil prices and weakness overseas.

Another sector which could benefit from under-performing stocks would be the real estate sector. If investors can't get returns in equities, they are going to look for returns in other sectors. Institutional investors helped prop-up real estate by purchasing massive amounts of foreclosures during the aftermath of the recession. Individual investors have returned to real estate slowly but surely, by purchasing homes and investment properties. Continued malaise in the stock market could hasten this process. 


Mike Ervin
NMLS # 282715
W.J. Bradley Mortgage
mike@mikeervin.com
www.mikeervin.com
(650) 451-7797
(650) 766-8500

What a Difference One Month Makes

Let's go back four weeks. We are fresh off an increase in rates by the Federal Reserve Board and a Holiday Season. We are bracing ourselves for several rate increases in the coming year and a rise in rates on home loans. It took only one trading day for stocks to get our attention. Oil prices continued to move to levels we have not seen for close to a decade during our recession. World economic news made headlines as the stock market in China took a beating.

All of a sudden, rates are coming down as stocks suffer a correction, despite the Fed's activity. To explain all of this, we go back to two points we have made time and time again in our economic analysis. Number one, the Fed directly affects short-term rates, but does not control long-term rates directly. Certainly, there is an indirect effect on long-term rates resulting from the Fed's actions. Secondly, you can't predict the future, period. Even the Fed does not know what is going to happen.

We do know that if this news continues, the Fed's plan to continue to raise rates may be put on hold. There have been some bright spots. One bright spot has been job creation, though wage growth has been moderate. The other bright spot has been real estate. Soon we will see some news on both. The jobs report is released Friday, and shortly thereafter we will see if consumers are still purchasing homes while some of this turmoil is hitting the markets. It was a real interesting first month of the year, and we are just getting started.

Mike Ervin
NMLS # 282715
W.J. Bradley Mortgage
mike@mikeervin.com
www.mikeervin.com
(650) 451-7797
(650) 766-8500

The Oil Factor

We have addressed the price of oil several times in the past year or so. Thus, we should have had most of the issues on the table. However, each time we speak about the price, a few months later, the price of oil goes down again. First, we must say, that we don't feel that the price of oil will go down forever. While we are not trying to predict the bottom, it is likely to come sometime this year, if we have not seen it already.

In the short run, the low price of oil helps many consumers and therefore helps the economy through increased spending in other areas. At the same time, companies in the energy sector will suffer layoffs. Also, some regions of our country will suffer, as well as many countries that depend upon oil revenue for their economies. If oil prices rebound, the effects will be short-lived. But if oil stays low, the effects will become long lasting, including the affects upon consumer behavior.

For example, the type of cars people purchase. Especially now that cars have become more fuel efficient, expect to see more SUVs and larger cars on the road in times that gas prices are low. In the long run, if the price of gas stays low, it may also affect home buying habits. With prices rising to unaffordable levels in many central cities, it is predicted that many will again look to the suburbs for lower cost housing. And lower gas prices may very well facilitate this trend in the long run. It is expected that if millennials move to the suburbs, they will be looking for developments that resemble conveniences of cites, such as town centers. Thus, the price of oil bears watching for many reasons.

Mike ErvinNMLS # 282715W.J. Bradley Mortgage
mike@mikeervin.com
www.mikeervin.com
(650) 451-7797
(650) 766-8500

The Stock Market Factor

It has been more than two weeks since the first trading days of the year, but the world is still reverberating from those first few days. What apparently started in China spread around the world as stocks, which have enjoyed a great run since the recession, finally ran out of steam. It took only a few days for U.S. markets to move into correction territory as the losses felt the first trading week were the worst ever for the first week of the year. Putting this in perspective, stocks moved down over 10% below their peak, but are up over 100% since the trough of the recession some years ago.

Even though last year was a wash, stocks have not really had a sustained correction for almost five years, the last being in the summer of 2011. All other dips have been accompanied by almost immediate recoveries. Thus, these numbers should not be scaring anyone, at least for now. While we can't predict the future, it is right to ask what this correction means, especially if it is sustained for any length of time. For one thing, with our economy producing jobs at a healthy rate, if the markets are predicting an economic slowdown, that slowdown is not evident right now.

The question is, is the slide because stocks need a breather, or are slower times coming? And if slower times are coming, what does that mean for the Fed's plan to raise rates again this year? When stocks took a hit, long-term rates moved down and so did oil prices. Both of these factors help the economy, but low oil prices are hurting some sectors and some other countries. Finally, we are seeing what a wild card the world economy and world conflicts can be. No one can predict the next international incident and the consequences of such an incident. The conclusion? It looks like 2016 is going to be a wild ride, so hang onto your hats! 

Mike ErvinNMLS # 282715W.J. Bradley Mortgage
mike@mikeervin.com
www.mikeervin.com
(650) 451-7797
(650) 766-8500

So The Fed Increased Rates

Many analysts weighed in regarding the "after-effects" of the first rate increase by the Federal Reserve in almost a decade. At least initially, these predictions seem to be bearing out. For example, according to Freddie Mac’s chief economist, Sean Becketti, interest rates should remain at “historically low levels” throughout 2016, in spite of whatever moves the Federal Reserve is expected to make. “We take the Fed at its word that monetary tightening in 2016 will be gradual, and we expect only a modest increase in longer-term rates,” Becketti said. “Mortgage rates will tick higher but remain at historically low levels in 2016.”

Yes, we experienced the first increase in the prime rate of banks in almost a decade. But with regard to long-term rates, these rates have barely moved in the weeks after the Fed's action. The rate on the 10-year Treasury note averaged 2.26 in November. On January 5, the rate was 2.25. Of course, world events have intervened to help lower rates as well. Keep in mind that if the Fed continues to raise short-term rates in 2016, it is expected that long-term rates will eventually drift upwards. This would include an increase in rates on home loans.

However, though many are expecting more increases, intervening events around the world may very well tie the hands of the Fed with regard to their ability to move as quickly as some are predicting. Domestically, the most recent employment report released Friday is a good indicator of future activity absent of such world influences. The increase in jobs of almost 300,000 was another sign of strength, and it will help bolster the Fed's plans. The message? Though rates are low right now, those who wait too long to purchase a home may be paying a higher price for that home and higher financing rates as well.

Mike Ervin
NMLS # 282715
W.J. Bradley Mortgage
mike@mikeervin.com
www.mikeervin.com
(650) 451-7797
(650) 766-8500

Happy New Year

Seinfeld spent just about a whole episode discussing how late in the year it is appropriate to wish someone "Happy New Year." I promise this will be my only Happy New Year message. But I do have a similar economic question to ponder as we enter the year. How long until we know what type of affect the Federal Reserve Board raising rates will have on interest rates and the economy?

Some of the effects are immediate. The prime rate was just increased by banks for the first time in almost ten years. For those who have home equity lines of credit on their homes or credit cards based upon their bank's prime rate, rates will go up immediately. A small increase of .25% on a $10,000 balance amounts to only a few dollars per month. If the Fed continues to raise rates this year, these effects will be multiplied, obviously.

The affect upon real estate is quite different. Most home loans are fixed rates and thus based upon long-term interest rates which don't necessarily increase at the same pace as the short-term rates the Fed are raising. According to Freddie Mac’s chief economist, Sean Becketti, interest rates should remain at “historically low levels” throughout 2016, in spite of whatever moves the Federal Reserve is expected to make. While any increase in rates on home loans is certainly not good news, we have to remember that rates are still at "historically low levels" as Becketti says, and the fact that the Fed is taking action means they have confidence in the economy. If the economy continues to expand, real estate will continue to thrive as will the economy, despite the Fed's moves.

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