Resilient Markets

It has been five years since the collapse of the financial markets. Five years ago, the world financial systems were on the brink of collapse. For five years we have been crawling out of a deep hole. You can't get very far by crawling, but if one moves forward little-by-little for five years, how far we have come will look very impressive. Let's just look at the stock markets. Early in 2009 the Dow Jones Industrial Average bottomed at just under 6500 in reaction to the crisis. This year the Dow has topped 15,500 twice. That is a gain of approximately 140% in under five years. Even more impressively, the gain does not seem to be slowing much as the rally matures. Thus far in 2013, gains have exceeded 15%.

Every time the markets look like they are in the middle of a correction, they seem to bounce back nicely. This year, the market has been affected by rising interest rates and the situation in Syria. Each time there is a pull-back it is brief and then a comeback ensues. One has to ask if there is more room on the upside after such a run. The answer boils down to two issues. First, will the economy keep recovering at a decent pace? Second, will this recovery cause interest rates to rise high enough to slow down the train? The economic recovery is definitely stronger today paced by a recovered auto industry and recovering real estate markets. But it still has not been strong enough to create enough jobs to replace those lost in the recession, let alone keep on pace with population growth. The statement released after the meeting of the Federal Reserve Board last week echoed that concern. Growth that is too strong might actually turn out to be a recipe to slow the run we have seen.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

It Really Does Mean Something

For the past few years since the recession ended and the stimulus plans were put in place, every meeting of the Federal Reserve Board has meant very little to the financial markets. The Fed had basically shot every bullet in their gun by forcing interest rates down to unheard of levels. Typically the Fed focused upon only short-term interest rates by lowering discount and federal funds rates. But the severity of the recession and tenuous recovery called for unprecedented medicine in the form of purchases of hundreds of billions of dollars of Treasuries and Mortgage-Backed Securities. These purchases were designed to not only keep long-term rates low but also help shore up a residential finance market.

Every meeting of the Fed since that time has created no suspense whatsoever. Running out of things to say, the Fed reached into their bag of rhetoric and made statements such as -- we will keep rates low at least until 2014, which was quite a statement back in 2012. This week's meeting of the Federal Reserve Board tells us that recently the ho-hum part of Fed watching is over. Long-term interest rates have risen significantly this year, mostly on speculation that the Fed will taper off purchases of long-term interest rate securities in the face of a recovering economy. However, while the economic numbers have been better this year, employment growth is still not strong enough to keep pace with population growth and the over-all expansion of the economy is still tepid at best. So what is the Fed to do with the economy still not strong but the markets feeling like the time is right for rates to get back near "normal"? That is where the suspense comes in. Only a strong statement from the Fed can influence the markets in this environment.

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

The Employment Report "Report"

Every month we seem to sit on edge waiting for the employment numbers. There is good reason for this, of course. During the recession America lost several million jobs and we have yet to recover fully from these significant losses. Though the unemployment rate keeps falling from its peak during the recession, it is nowhere near the low of 4.4% we reached in 2007. What we are talking about is slow and steady progress. A drop in the unemployment rate from 10.0% to 7.3% is pretty significant. But at least some of that decrease is due to many adults leaving the labor force. That includes those who are retiring and those who become discouraged and put their job hunt on hold. For example, a spouse may decide to stay at home with their children if the job they can find does not pay for child care and other expenses of working.

This slow and steady progress mirrors exactly the state of our economic recovery for the past four years. Slow growth is much better than a recession or no growth. But it is not strong enough to satisfy our appetite for repairing the damage done by the recession. The real question is whether the Federal Reserve Board thinks that the jobs numbers are strong enough to start easing off the gas pedal with regard to stimulus activity. Interest rates have risen precipitously this year in anticipation of the Fed reversing course. The Fed is watching the jobs numbers closely as well. The average jobs creation for the past three months has been just under 150,000 per month. That is a big improvement from the recession years, but not strong enough to keep up with population growth. If the Fed concludes the numbers are not strong enough, we may enjoy lower rates for a longer period of time. And that would be good news. The Fed meeting this month will be watched closely for clues in this regard.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

Back to Oil Prices and Real Estate

A few weeks ago I discussed the effect of higher oil prices on the economy. We know that as energy prices rise, it saps strength from the economy because consumers have to use more of their income to pay for the cost of energy. In the past few months oil prices have risen to over $105.00 per barrel--and that was before Syrian crisis hit the headlines last week. The price of oil has escaped the forefront of discussion this year because we have not seen gasoline prices spike at the same time. In the long run we know that higher oil prices will lead to higher gas prices as well as increased costs for other forms of energy. My focus today is not on the short-term effects of energy with regard to the economy. Today our focus upon the long-term effects of higher energy prices on real estate. If you look at the real estate recovery we are experiencing more recently, the price of energy is a factor.

The present real estate recovery is uneven in many ways. Lower priced homes are hot and the luxury home market is not recovering at the same pace. Some states are hot while others are still languishing. Another trend shows that inner cities and close-in suburbs are doing better than outlying areas. It is here where we think energy prices are a factor. We have reported previously that the Millennial Generation does not want long commutes. Many prefer to use mass transit or live walking distance from work. This has become an important factor in this decade because for a generation, inner cities have suffered as the suburbs boomed. Now the tide has turned in many cities. Will this trend continue? Any future spike in energy prices will certainly serve to reinforce this new trend. I think that this story bears watching with regard to the future of real estate. Meanwhile, back to the present. This week comes the all-important jobs data which will make it an interesting back-to-work and back-to-school week. The most recent run-up in rates could be reinforced or reversed by employment data that surprises in either direction.

 

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

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