Maybe It's Not a Fluke

Maybe It's Not a Fluke

Two weeks ago we published a column entitled "Words of Optimism." Last week a surprisingly strong employment report was released. Was this a coincidence or was it an accurate prognostication? We do know that the jobs data can be tricky. What looks strong one month can be reversed the next month as the new month's data is always accompanied by revisions of previous numbers. Thus, we would need to see two or three months of strong jobs reports before we declare a turnaround and a great prediction (or a lucky guess). On the other hand, the words of optimism were based in fact and those facts included the important numbers regarding increased household formulation. As a matter of fact, household formulation and jobs data are clearly linked.

As more jobs are created, more households are created as children move out on their own. This demand for housing -- both rental and purchase -- creates more jobs. This relationship created a vicious cycle during the recession. Today it could influence the start of a virtuous cycle in which the economy is buoyed by both factors working together. Again, our thoughts are not just the result of rampant speculation. A recent report by the Federal Reserve Board indicated that the employment rate was set to fall in the coming months -- "Across the board, these indicators show the pace of the labor market recovery has increased compared with a year ago," wrote Mary Daly, the San Francisco Fed's deputy research director, and colleagues Bart Hobijn and Benjamin Bradshaw. "We take this as evidence that the recovery in the labor market is robust, broad-based, and likely to continue, if not accelerate, over the coming months." (Reuters). So, perhaps the surprising jobs report was not a fluke. But we still need to see a few more months of data to really determine if this is the case.

Mike Ervin
Mortgage Loan Officer
NMLS # 252715
C: 650.766.8500
P: 650.735.5261
mike@mikeervin.com

Employment Report & Turkey Day

A busy week included both an Election Day and a release on the employment numbers for October, as well as numerous additional points of data. The employment report was surprising to say the least with the markets assuming that the government shutdown would have held a lid on hiring during the month while government workers were furloughed. Not only was the addition of over 200,000 jobs more than expected last month, but the previous months data was adjusted higher as well. Economic data measuring activity in the manufacturing and service sectors also exceeded expectations. This strong data is important with regard to influencing measures of consumer sentiment which had turned lower during the month as the shutdown drama unfolded. From here, stronger consumer sentiment is critical. Why? Because it is shopping season.

November is the start of the Holiday Season and market analysts will be at the malls more frequently. Perhaps they will be doing some shopping, but more than likely they will be measuring early data regarding how busy the shopping season will be. Each year, store traffic becomes less important because so many are shopping on line. We are approaching both Black Friday and Cyber Monday in a few weeks. Though the word is that many stores will be open on Thanksgiving Day and perhaps Black Friday will become Black Thanksgiving Weekend. Certainly on-line shopping is open on Turkey Day so why not the stores? Well, those who have to work Thanksgiving Day certainly will not be thrilled -- unless they don't like turkey and football.

Let the games begin!

Mike Ervin

NMLS # 252715

C: 650.766.8500

P: 650.735.5261

mike@mikeervin.com

Words of Optimism

Like the past few years, economic growth has not been strong in 2013. Yet, for some reason this year the country seems to have more optimism regarding prospects for the future. The obvious question is--why the optimism? To us it all boils down to two words --- household formation. The creation of households bottomed during the most recent recession--down to below 400,000 per year from an average of 1.2 million per year over the past 65 years. This lower average was a significant drag on the economy. In the past two years, annual household growth has soared back to 1.1 million in 2011 and 2.4 million in 2012. Kids are moving out of their parents' houses in droves. Why is this increase in household formation so important? It is more than just a direct relationship between formation and the need to build homes.

Even if the kids move out and rent an apartment, this increases demand for multi-family housing and we have seen this market recover significantly. Some will purchase or rent single family homes. And starting a household requires the purchase of furniture, cars, insurance and more. If you look at the projections for growth in the next few years, it is no wonder that single family home starts are expected to double from the depths of the recession by 2015 (see the article in the news section). It is also no wonder that the job growth is predicted to increase substantially in the next six months according to a Federal Reserve Bank of San Francisco report. We may be in a pause now because of the effects of the government shutdown and the accompanying uncertainty; however, growth spurred by household formation is inevitable. There can always be intervening variables, but the numbers are there for a solid recovery moving forward from here.

Mike Ervin

NMLS # 252715

C: 650.766.8500

P: 650.735.5261

E: mike@mikeervin.com
















 

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