January Been a Wild Ride

In the past two weeks we have gone over a review of 2014 and also presented some predictions from economists for 2015. However, no one could have predicted the wild ride the markets would have in January. In early January, after just a few days, we looked like we were headed into the long-awaited stock market correction. It took only a few more days of strong rallies to ease those thoughts for a few days, and then the markets reversed course again.
Oil prices are down substantially. And while that may hurt some foreign countries, some stocks and certainly the oil industry, it helps the average consumer. If you consider the peak of oil in 2014, the cost to fill up your car has been almost cut in half. That is a lot of savings. Long-term interest rates are also down which translates into more savings for the consumer. For example, by mid-January rates on home loans were the lowest in more than 18 months. More and more consumers are refinancing home loans and garnering major savings.
Lower oil prices and lower rates? The economy must be really hurting. Yet, the December jobs gains tell us that the opposite is true. We just finished a year in which the economy added almost three million jobs, the best year since 1999. On the face of it, rates should be increasing when economic growth picks up. There are many factors holding rates down and most of them are international. The economies in Europe, Russia and in many other countries are not strong. One must remember that we are now in a world economy. Even our growth is uneven with certain states faring better than others and the world is the same way. For our citizens in general, it is a win-win situation.

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.735.5261
C: 650.766.8500
 

Unbridled Optimism

We move into 2015 with a flurry of projections to analyze. If we could summarize these projections using one word, that word would be -- optimism. The predictions for the most part seem to be optimistic with regard to economic growth for the next year and that includes the real estate markets which actually lagged the overall economy last year. Here are a few samples of the words used by these prognosticators---

• "The U.S. economic outlook looks brighter, with growth likely to be somewhat above the trend of the past five years," New York Fed President William Dudley;
• "Many of the gains that we recently predicted in the realtor.com® 2015 Housing Forecast are built on housing growth established in 2014,”  Jonathan Smoke, realtor.com®’s chief economist;
• "The housing market is likely to continue its gradual climb upward next year after a sub-par 2014. We anticipate a fairly strong increase in housing starts in response to stronger employment and some improvement in related household incomes," Fannie Mae Chief Economist Doug Duncan.

Before we jump on the bandwagon, we must remember that no one can predict the future. As a matter of fact, we had similarly robust predictions about growth in 2014 at the end of 2013. The severe winter of 2013-2014 put a wrench in those predictions. Usually, predictions are based upon what is happening right now. The fact that the U.S. economy grew by 5.0% in the third quarter gives us optimism for 2015. So did the pace of job creation in November. Thus, December's job's numbers became important with regard to momentum going into the year and the numbers did not disappoint. The 252,000 jobs capped a year in which we added very close to three million jobs, which is the most in 15 years. Thus, not just optimism, but unbridled optimism. 

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.735.5261
C: 650.766.8500

Looking Back

Next week we will spend some time sharing predictions for 2015. But first we want to take a look back and see what happened in 2014. We started the year with a severe winter and a slowdown within the economic sector. We ended the year on an upswing best exemplified by the recently revised estimate for economic growth in the third quarter. The five percent growth rate was the strongest in over a decade. Though we are not expecting that the number for the last quarter of the year will come in at that level, there is also no evidence of a sharp slowdown in the rate of growth for the last quarter of the year.

Employment growth picked up nicely in 2014. Well over two million jobs were created last year and the unemployment rate dropped almost one percent to below six percent with December's numbers still to be released. Inflation stayed tame this year and wage growth did not pick up significantly -- thus all was not a bed of roses with regard to the employment sector. On the other hand, the low inflation rate enabled mortgage rates to stay low throughout 2014 and oil prices dropped significantly, especially in the second half of the year.

Meanwhile, the growth in the real estate market slowed somewhat in 2014. The pace of real estate sales leveled off and price gains were more moderate that the previous two years. As we have emphasized, the adjustments in the real estate sector are mainly related to the drop in distressed sales, which is actually a sign of normalization. Finally, the stock market was volatile but marched upward for most of the year as the bull market continued. This year's gains of over ten percent for the S&P Index has contributed to a gain of well over seventy percent during the past five years -- completing the stock recovery from the financial crisis lows of March of 2009. To illustrate, the Dow closed at a low of 6,547 in March of 2009 and finished 2014 close to 18,000, which now represents the fourth longest bull market in history while the drop in crude oil and Europe's faltering economy have helped drive down mortgage rates to the lowest levels in 18 months.

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.735.5261
C: 650.766.8500

 

What a Wild Ride

Things are supposed to get quiet as the holidays approach. But we had nothing but noise in the markets leading up to the holidays this year. It seemed as if the markets were on a roller coaster as we closed in on the end of the year. For example, the Dow was at 16,321 on October 13 and by December 5, it closed over 17,950. By December 16 the Dow had fallen to below 17,100 and a few days later it was up over 18,000. Meanwhile oil prices and interest rates were just as volatile. The precipitous drop in the price of oil has been discussed previously as the move has brought the price down close to 50% in just over a year.

Interest rates have also moved significantly in the past few months. Two major factors have influenced rates during this time. Stronger job growth has convinced the markets that the Federal Reserve Board will raise short-term interest rates during the first part of next year. At the same time, slower growth overseas and lower oil prices have contributed to a drop in long-term rates -- including rates on home loans. Following the lead of the stock market, long-term rates have drifted when the stock market experienced their downturns and the drop in oil prices, but there has been a lot of volatility on the way. At the same time, short-term interest rates have risen steadily in anticipation of action by the Fed.

So where do we go from here? The fact that short-term rates have risen while long-term rates have fallen this year demonstrates an interesting point. Just because the Federal Reserve Board raises rates, it does not mean that rates on home loans will be rising. The Fed directly controls short-term rates, but does not directly control long-term rates, though they can influence long-term rates significantly. If the markets perceive that the Fed is raising short-term rates in a direct response to the threat of inflation caused by a stronger economy, it is more likely that long-term rates will also rise. But if the markets feel that the Fed is raising short-term rates at a time in which the economic recovery is still in question, then the move in mortgage rates may not be as strong.

Wishing you a happy healthy and prosperous New Year.


Mike

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.735.5261
C: 650.766.8500

Oil Prices and Interest Rates

It was a very interesting time for a meeting of the Federal Reserve Board's Open Market Committee. As we discussed the past few weeks, the increased pace of job growth will cause the economy to expand more quickly and this will make it easier for the Fed to make a decision to raise rates more quickly. On the other hand, there are other factors in play. For example, many world economies are slowing significantly. Our economy is intertwined with the global economy and the Fed must worry whether this slowdown might affect our strengthening recovery.

Oil prices represent another wild card. The magnitude of the drop in the price of oil has been absolutely stunning. The move from $110 per barrel in August of 2013 to less than $60 per barrel by the middle of December represents a decrease of around 50% in a little over a year. Lower oil prices are also good for the economy because of the potential for reduced consumer inflation. This reduced inflationary pressure enables the Fed to be less inclined to raise interest rates.

Not all of the effects of lower priced oil are positive. The energy sector is a significant industry and if the price of oil stays too low, we could lose jobs within this sector. For example, the jobs created in the oil shale industry may be lost if it is not cost effective to extract oil from shale. And going back to the global focus, major nations such as Russia depend upon revenues from oil and their situation is potentially much graver than ours. Of course, the oil factor also influences the thinking of the Fed with regard to rates and when the announcement was made on Wednesday, there was a sense that the Fed wanted to calm the markets somewhat with the use of words such as "patience." If that means continued low rates with low oil prices, we say Happy Holiday!

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.735.5261
C: 650.766.8500

November Jobs Report Released

We had a pretty interesting two weeks leading up to the release of the jobs report. Not only did we have a major holiday, but we had some significant data releases. Plus we had a meeting of major oil producers (OPEC) while oil prices were reaching their lowest levels in the past five years. It was a surprise to some that OPEC kept production levels the same in the face of these lower prices, but other analysts had predicted this because OPEC is not wielding the same pricing power as they did in the previous decades.

What does the price of oil have to do with jobs? In the short run, energy prices are not as important as the effect of the severe weather we had experienced in November. But in the long run, if the price of energy stays low this helps the economy. The more consumers can spend this Holiday Season, the more jobs will be created -- and when people spend less on gas they have more to spend on other purchases.

The employment report showed that our severe November weather was not a factor in hampering the economy. The strong gain in jobs of over 300,000 continued a year in which the economy has added well over 200,000 jobs on a monthly basis. Right now we have a good chance to add the most number of jobs annually since 1999. To this news, we can add that car sales had their best month in a decade and the service sector expanded at its highest rate in nine years. All-in-all it was a strong week for economic data. One would expect that shortly this success will start showing up in the form of higher real estate sales. We could experience a strong spring real estate market.

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.735.5261
C: 650.766.8500

Polar Vortexes and Predictions

We have had some pretty optimistic projections recently from economists. For example, the following is from the Wall Street Journal's monthly survey of economists ...Faster job growth and stronger consumer confidence are already putting the U.S. expansion on a steady trajectory heading into 2015 and falling energy prices are offering another boost... While I share this enthusiasm, we also must remember that absolutely the same predictions were made at the end of last year. What happened? It was the weather. By the time America dug out from all the snow, it seemed the economy was playing "catch-up" all year.

Well, the weather this November reminded us how important Mother Nature can be. Just ask Buffalo, the recipient of five to eight feet (that is feet, not inches) in a week. Of course, they are hoping that winter is over in December and it is not just starting! On the other hand, the weaker start to the economy was not just about the weather. The real estate recovery also took a pause in 2014. The early bad weather hurt, but in reality slower real estate sales were not just about a weaker market. The real estate statistics were pumped up previously by investors buying foreclosures -- many times in bulk.

As foreclosures have decreased, so did these sales. Meanwhile, real estate sales have been increasing steadily during the second half of the year despite the loss of this segment of the business. In essence, the market is normalizing and we fully expect that the first time homebuyer will again replace the investor as the most important segment of the real estate market. It will take some time, but the fundamentals are in place. Meanwhile, this week we get another important reading on the employment sector. This will tell us if we will continue to have momentum heading into the new year and whether the Polar Vortex is providing another temporary respite from the recovery.

Mike Ervin
Branch Manager/Mortgage Loan Officer
NMLS: 282715
O: 650.735.5261
C: 650.766.8500