The First Big Event

The Holidays are just behind us and already we are coming up to the first big economic event of 2014. On Friday the employment report for December will be released. In addition, it is "jobs" week with releases such as Wednesday's ADP payroll report and Thursday's first time claims for unemployment. The stock markets ended the year on a roll and much of this roll was due to economic optimism which arose from strong jobs reports during October and November.

 

This month we not only will be watching the December release, but also potential adjustments to the previous two months' numbers. The unemployment rate fell from just under 8.0% to start 2013 to 7.0% by November. The increased number of jobs created bodes well for overall economic performance and also will help dictate how quickly the Federal Reserve Board will wind down their stimulus programs.

It may well be that market watchers have come to expect stronger jobs reports and any numbers released well short of 200,000 jobs created may cause some consternation in the markets. While stocks may react negatively to a surprise on the downside, this would likely help dampen the rise in long-term interest rates we have been experiencing. In addition, because the jobs report is being released a bit late this month because of the Holidays and the calendar, the February report will come rather quickly.

 

Mike Ervin

Mortgage Banker

NMLS # 252715

C: 650.766.8500

mike@mikeervin.com

Can House Prices Rise as Sales Slow?

Here is an interesting picture. The S&P/Case-Shiller House Price index showed prices in the 20 largest cities increased 13.3 percent annually in September, the highest year-over-year increase since February 2006. Yet, existing home sales have slowed a bit and pending home sales have been lower for several months, according to the National Association of Realtors. How can home prices be rising at a time in which home sales are slowing down? The answer is found in two important numbers. For one, the percentage of distressed sales is falling as the foreclosure inventory shrinks. LPS reports that the foreclosure inventory is down 30% over the past year. Since distressed homes sell at a significant discount over non-distressed sales, it makes sense that the average sale price is rising. During the height of the housing crisis, the flood of foreclosed homes exaggerated the drop in home prices and on the way out of the crisis, the rise in home prices his now exaggerated by the lower numbers of these sales.

Secondly, we still have a lack of inventory in many markets, especially at the lower end of the market. Housing sales are being held back because of this lack of inventory but at the same time we are not seeing slower housing sales cause downward pressure on prices. If there is more demand than supply, prices will be stable or rise regardless of the number of total sales. What does this mean for the future? If demand continues to rise, housing prices will continue rising or at least stabilize. The first factor -- distressed sales --- will become less of a factor in the future as we approach normalized levels of distressed sales.

The key is demand. If the economy continues to produce jobs at a decent rate, then we will have a greater demand for the real estate market. That is what makes November's employment report interesting. Heading into December we had a series of numbers which pointed to a stronger jobs market, including the lowest number of first time claims for unemployment benefits since before the recession started and a strong October employment report. This made the markets optimistic before the numbers were released. And the numbers did not disappoint as the economy once again created more than 200,000 jobs and the unemployment rate dropped to 7.0%.

Mike Ervin

Mortgage Banker

NMLS # 252715

C: 650.766.8500

mike@mikeervin.com

The Muddled Oil Picture

We find it kind of interesting that the stock market continues to hit records at a time in which oil prices are moderating. Conventional wisdom tells us that the stock market rallies when the economy is getting stronger. A stronger economy causes higher demand for energy. That would cause oil and gas prices to rise. Yet, in August oil prices pushed to approximately $110 per barrel and by the middle of November, they had receded to below $95.00 per barrel. In the meantime, in the middle of November stock prices hit record levels again. Why the disconnect? Some of the drop in oil prices could be associated with the uncertainty which accompanied the government shutdown -- however the stock market did not seem to be affected by the shutdown and oil prices did not rebound when the shutdown was over. There are also seasonal factors. We got through the hurricane season without any major storms which could have damaged our ability to produce oil. Finally, the progress towards the Iranian nuclear agreement also weighed in on oil prices.

On the other hand, there were some additional important announcements that are affecting the overall picture. The International Energy Agency reported that the U.S. will surpass Saudi Arabia as the top oil producer in the world by 2015. The Administration also announced in November that our oil production is at a 24-year high and our imports are at a 17-year low. The factors for this include both new oil extraction technologies such as fracking and more energy efficient cars. Long-term projections in the IEA report were not as optimistic; however, for now the energy picture is getting better. Why is this important? As the economy grows, if oil prices also increase this causes a drag on economic growth. If in 2014 oil prices stay where they are, consumers will have more money to spend in other areas --from furniture to cars to houses. In other words, if it holds the oil price picture could be very good news. Meanwhile this week we will see another jobs report. This one is sure to be interesting as a follow-up to the surprisingly strong report from the previous month.

 

Mike Ervin

NMLS # 252715

C: 650.766.8500

P: 650.735.5261

mike@mikeervin.com

Happy Thanksgiving

It is all about turkey and giving thanks this week. As much as we have struggled to rebound from the financial crisis and recession during the past five years, we have plenty to be thankful for. For one thing, our rebound did happen -- albeit very slowly. Just a few years ago, economic prognosticators were predicting that real estate would not rebound for at least a decade. It has been five years and we are already at least one year into a rebound. Again, we are not all the way back but at this point you can't deny the progress we have made. No longer is the number of homes going into foreclosure leading the headlines. Now the drop in the number of foreclosures highlight the statistics.

The same can be said for the job market. We lost over eight million jobs during the recession and it has taken us this long to come up close to making up those eight million jobs, which does not account for the population growth of the past five years. Yet, the unemployment rate has dropped from 10.0% to close to 7.0% -- a drop of almost 30% in four years. According to the Federal Reserve Board, the unemployment rate is poised to drop further in the coming months. We took a very large economic punch in the gut five years ago and we have now regained our footing and we are now punching our way back. That is called resiliency. And when others face tragedies such as the Typhoon that hit the Philippines a few weeks ago, we step up and help others in need. Yes, the past few years have been a struggle for millions, but we also have a lot to be thankful for -- not the least of which is the turkey we will have on our plates tomorrow.

Mike Ervin

NMLS # 252715

C: 650.766.8500

P: 650.735.5261

mike@mikeervin.com

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