Mid-Year Employment Reading

Mid-Year Employment Reading
We hope that everyone enjoyed the 4th of July Holiday. There were plenty of fireworks during the weekend but the day before the holiday started the government provided their own fireworks with the release of a strong jobs report for the month of June. Most analysts were expecting a decent gain in jobs at just over 200,000 and for the unemployment to remain steady at 6.3%. The numbers were stronger than expected, especially when considering the fact that the previous months of jobs gains were revised upwards.

In June the economy added 288,000 jobs which is robust by anyone's standards. The unemployment rate dipped to 6.1% and the decrease cannot be attributed to people leaving the workforce as the labor participation rate stayed steady. Though these numbers are subject to revision in later months, the fact that ADP released a similar number for private payroll growth the day before just confirmed the fact that the job market is indeed heating up. What does that mean?

This is just what the doctor ordered for the economy. More jobs should translate into higher levels of consumer spending and especially spending on big ticket items such as cars, furniture and houses. A stronger housing market and automobile industry should create more jobs and the virtuous cycle will be created. If job creation continues at this pace, we should expect a pickup in interest rates and the growth in home prices should continue. We know we have said this before -- the combination of low rates and low housing prices will not last forever. While the stock market has been strong, rates have remained low. However, this news might just be the beginning of the end of the nation's sale on money.

Beyond The Numbers

We have received some good news over the past few months regarding employment growth. The creation of jobs is the most important function of the economy. When people can find jobs, this creates confidence. When people are secure in their jobs they tend to spend more. This includes large purchases such as houses and cars. Of course, the real estate sector is another huge factor within our economy. So, the next question is--how good are the job numbers? Here is the good news, May represented the fourth consecutive month of jobs gains over 200,000 and that is the first time that has happened since 1999.

On the negative side, the labor participation rate was 62.8%, which was unchanged from April. This is the lowest rate in decades. We do understand that this number is affected by the number of people retiring and with baby boomers aging there are record numbers retiring. But it is also affected by the fact that the population has been growing. A few weeks ago, we pointed out that the population growth of our country may be poised to present us with a housing shortage in the future. Well, it also means that we must create more jobs than ever before and that has not happened yet.

We lost 8.7 million jobs during the recession. Again, the good news is as of May these jobs have been recovered over the past four years. That is a rate of approximately 180,000 jobs per month. We are now creating jobs at over 200,000 per month. If we can create jobs at a rate of 200,000 to 250,000 per month this would appear to help us catch up with population growth in a few years and lower the unemployment rate further. We believe as more people obtain gainful employment, they will spend more money and this will spur housing and other sectors of the economy which will create more jobs. That is what a virtuous cycle is all about and that is why this "200,000" number is so important.


Mike Ervin
Branch Manager/Mortgage Loan Officer

NMLS: 282715

W.J. Bradley Mortgage Capital, LLC

O: 650.735.5261

C: 650.766.8500

No More Excuses

Over five years ago we suffered the worst recession since the great depression almost 100 years ago. Since then our economic recovery has been the weakest of all recoveries as well. There are many reasons for the weak recoveries. The fact that our real estate market was devastated and needed years to recover was certainly a main factor. But there were other reasons for the stops and starts which were external. We had domestic and world-wide natural disasters from hurricanes and super storms to tsunamis. We will not get into a debate as to whether global warming is causing these extreme weather events but we will acknowledge that they were very, very extreme and caused major damage to populations and property.

There were events that were not weather related, of course. There was the fiscal crisis in Europe and political crises at home. We had wars being fought and terrorist events. Many of these events prolonged the recovery and made us wonder whether we would suffer a double dip recession, which never came. 2014 has certainly not been smooth sailing with our famously cold winter and the crisis in Ukraine. However, we believe our economy has recovered to the point that we no longer talk about slipping back in recession. The drop in the economic growth in the first quarter is a testament to that confidence. Economists shrugged off the down quarter almost universally. So what comes next?

The sun is shining and there is no more cold winter. We are running out of excuses for the economy being so lackluster during a recovery period. The employment report released on Friday showed continued progress in that regard. The last two months has seen a significant pickup in hiring but the employment report also shows how far we need to go. We have recovered all the jobs lost during the recession, but accounting for population growth during the past six years, we have seven million jobs to go. Economists surveyed by CNN/Money indicate that it would take two years or more at this pace for the unemployment rate to reach 5.5% and wage growth is still anemic. The good news? A slow recovery continues to support low interest rates and hopefully the Federal Reserve Board agrees with that assessment when they meet shortly.


Mike Ervin

Branch Manager/Mortgage Loan Officer

NMLS: 282715

W.J. Bradley Mortgage Capital, LLC

O: 650.735.5261

C: 650.766.8500

Anyone Have a Spare Listing?

It really could not be predicted. For years during and after the financial crisis analysts warned that the real estate market would be weighed down by an avalanche of bank-owned properties and short-sales. And these analysts were right, at least for awhile. But quicker than most everyone expected we turned from a buyers' market to a sellers' market in many areas of the country. How can it be that buyers can't find homes for sale when there are still so many foreclosures to deal with?

One reason is that investors have bought every bargain in sight. Those with the money recognize good buys and investor money poured into the real estate sector. Another reason is that home building slowed down to a snail's pace during the recession and we were not building enough properties to keep up with our muted household growth, let alone older homes which had to be replaced. Finally, the most recent long, cold winter put a lid on new listings. This effect we have hypothesized to be temporary and already we are seeing numbers that support this hypothesis.

But there is another reason and this reason is psychological. Most who list their home are "moving up" to a bigger and better home or if they are closer to retirement, they are trading down. However, if they don't believe they can find the home they want, they will obviously be reticent to list. So the dearth of listings is actually causing some not to list. Is this temporary? We believe so. As more homes become available, more will list their homes. We are not looking for a flood, but more of a balanced market. Meanwhile, if you are thinking about selling--this may very well be an opportune time.

 

Mike Ervin

Branch Manager/Mortgage Loan Officer

NMLS: 282715

W.J. Bradley Mortgage Capital, LLC

O: 650.735.5261

C: 650.766.8500

Why Is China So Important to Our Interest Rates?

The past few weeks has seen some major volatility within the stock markets. Some weeks have seen major pullbacks and others we have seen significant bounce-backs. The first ten days of April, the volatility of the markets hit on the downside. One thing which is interesting about this pullback is that it happened as the economy was pulling out of its pause caused by a very cold and harsh winter. For example, the first week in April we saw a stronger employment report and the second week first time claims for unemployment fell to levels not seen for many years.

When stocks drop the analysts are always searching for explanations, yet sometimes there seems to be no logic. One card which keeps coming up in explanations this month is the threat of slower growth in China. So we must ask, why is China so important to us other than it is a huge economy? Certainly at a growth rate of over 7.0%, this is not an economy in trouble. For one thing, the Chinese populace travels overseas to the United States in great numbers -- almost two million per year. In 2012, the Chinese spent almost $9 billion in the United States.

Secondly, China helps keep our interest rates low in two ways. Their low cost of manufacturing lowers cost to our consumers. And the profits these manufacturers produce are eventually invested in US Treasuries. Basically, China is helping to finance our Federal budget deficit. More economic growth and lower rates? These are good enough reasons for us to hope that the growth in China continues. And good enough reasons to fret when it appears that the Chinese growth cycle is abating. So, if you are shopping for a home this week and enjoying the fact that rates on home loans are very low -- don't forget to thank the Chinese, as improbable as that may seem.

 

Mike Ervin

Branch Manager/Mortgage Loan Officer

NMLS: 282715

W.J. Bradley Mortgage Capital, LLC

O: 650.735.5261

C: 650.766.8500

 

It is Finally Happening

For years the slow recovery was hampered by the existence of tighter credit. A vicious cycle was created when the recession caused consumer credit to worsen and at the same time banks tightened up on lending standards. For some time we have been predicting that lending standards in the real estate sector would not loosen up until two factors emerged. Factor one was the stability or recovery of real estate values. It makes sense that lenders would be shy about lending in a real estate sector in which the underlying asset was unstable.

Yet, the real estate markets recovered over the past few years without a significant improvement in lending standards. Why? Some blamed it on new legislation aimed at making lenders more responsible with regard to their lending. But most aspects of the legislation were not implemented until recently. In reality, there was a second aspect we cited over the past few years which has now come to fruition. For the past three years lenders were inundated with refinances because of record low rates. Now with rates still really low but a bit higher than they were, the refinance craze has abated.

It makes sense that lenders would not lower standards while they were overwhelmed with demand. Today, lending standards are loosening because lenders are hungrier. Many national sources for real estate loans have lowered their minimum credit score requirements. And we think that this will flow into other areas of lending such as cars and business loans. This is all part of building a virtuous cycle. Keep in mind that we are not looking for a return to the subprime era or anything close to that. The new legislation we cited makes sure lenders will be more careful. Underwriters are still scouring loans with a fine-tooth comb. But it is interesting that while lenders are implementing the new legislative standards, their requirements are getting somewhat less restrictive.

Mike Ervin

Branch Manager

NMLS: 282715

W.J. Bradley Mortgage Capital, LLC

O: 650.735.5261

C: 650.766.8500

Is It The Weather?

For the past three quarters, the economy has grown at an annual rate of just under 3.5% based upon the preliminary numbers released in late January for the 4th quarter. This growth rate is even more impressive when you consider the fact that we endured a government shutdown for part of the last quarter of 2013. It is estimated that this shutdown knocked approximately 1% off the growth rate for the 4th quarter. A 3.5% growth rate, while not smoking hot, is strong enough to bring down unemployment while not igniting fears of inflation. A pretty good balance.

And this balanced growth is a good indication as to why the stock markets rallied strongly in 2013 while long-term interest rates rose. Now we ask whether this growth rate is sustainable for 2014. We had several weak reports released in January, including the December jobs report and a slowing housing sector. Some have hypothesized that the severe winter weather in December and even worse weather in January is the culprit. If this is the case, the numbers should bounce back--including the stock market and rates, both of which fell in January.

Keep in mind that storms actually can boost some sectors of the economy such as the use of energy. Our heating bills are telling us that. Last week's release of January's jobs report was another mixed bag with the unemployment rate unexpectedly moving down slightly to 6.6% but the total jobs created below forecast at 113,000. It is interesting to see both the number for January and also the revision of the previous months' numbers as there was very little adjustment to the disappointing December release but upwards adjustments in previous months. Weather related slowdown? With regard to jobs creation we certainly hope this is the case. We think everyone is hoping for a warmer February, though it has not started out that way. 

 

Mike Ervin

Branch Manager

NMLS: 282715

W.J. Bradley Mortgage Capital, LLC

O: 650.735.5261

C: 650.766.8500