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