The Fed Meeting Finally Arrives

The Federal Reserve Board's Federal Open Market Committee meets today and tomorrow. This is the most anticipated meeting of the Fed in almost a decade. It has been exactly seven years since the Fed moved short-term interest rates to close to zero and it has been over nine years since the Fed actually raised short term rates. Now the markets are expecting the Fed to raise rates from these historically low levels once again.

The Federal Reserve has indicated all along that the markets would get plenty of notice before they raise rates. This notice is designed to prevent market shocks. One must remember that the Fed is only raising short-term rates. For example, the Federal Funds Rate is the rate banks charge each other overnight as they balance their holdings. The other rate controlled by the Fed is the Discount Rate, which is the rate they charge banks for borrowing money. All very short-term. The question is--how can these rates affect long-term rates that consumers pay for loans on cars, homes, credit cards and even student loans?

Some rates, such as credit cards which are pegged to the prime rates charged by banks, may go up instantly. Other loans which are based upon longer term rates such as home loans, are not as easy to predict. That is where the markets come in. The markets react to what the Fed may do before they take action. For example, rates on home loans have risen in anticipation of the Fed's move. Now the markets will listen to what the Fed will say about potential future interest moves. So let's see what the Fed has to say in addition to whether they raise rates. 

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

The Wild Ride Continues

It has been a wild ride for the markets this summer. After a fairly calm beginning of the year which saw moderate gains, stocks have been on a roller coaster ever since. For the most part we have been rolling downhill, but the start of the fourth quarter has been pretty strong. And it is not only stocks gyrating wildly. Oil prices have been even more volatile this year. It is hard to believe that oil prices were in the $110 per barrel range last year. The decrease in oil prices of approximately 60 percent makes the volatility of stocks look like a pebble hitting the ocean.

Of course, several questions arise from what has happened this year. For one, will the gyrations continue? With regard to oil prices, the prevailing opinion is yes. We have a global economic slowdown at the same time Iranian oil is getting ready to hit the market. In years past, OPEC just throttled back production to keep oil prices stable. But this year they seem to be intent on hurting the U.S. shale oil business by supporting lower prices. On the other side of the coin, Russia's involvement in the Middle East is throwing more fuel on a fire and this is causing oil to rebound in the short run.

The next question is--how do these gyrations factor into the Fed's thinking as the Federal Reserve Board's Open Market Committee meets next week and in December with only these two meetings remaining to meet their own prediction of raising rates sometime this year. As we have said before, the Fed does not like uncertainty. The weak September jobs report adds to this uncertainty and this is why the markets feel that the Fed will pass on rate increases, at least for October. If they do raise rates, it would surprise the markets and this would go against the Fed's goal of making sure the markets are prepared for their next move. And that surprise would cause more volatility.

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

Listening to the Fed's Words

Forget about what the Federal Reserve Board did not do for a minute. Let's talk about what they said. With the Fed, it is usually more likely that their words will be more important than their actions, or lack of action. This has been a very turbulent end of the summer for the markets. Above all, the Fed is interested in restoring calm and especially making sure that their actions do not add to the instability of the markets. And we certainly have had some unstable markets during the past several weeks.


This is exactly why we were expecting "calming words" from the Fed when they made their announcement. Did we get these words? Absolutely. The Fed said that "recent global economic and financial developments may restrain economic activity somewhat." Two things are important about this statement. First, it is softened by using the word "somewhat," meaning the Fed does not see a risk of a world-wide economic meltdown. Secondly, the Fed used the words "international or global" more than once. The international issues broaden the scope of the Fed's focus from just looking at our jobs or inflation numbers.

Bottom line is that the Fed did not raise rates, though they did leave that option open for their last two meetings of the year in October and December. That is good news for the markets and the consumer. The stock market has already been under pressure lately and it did not need the extra pressure of a rate hike. And rates on home loans are likely to stay low in light of the Fed's decision. We can't think of better news for the consumer right now.   

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

How About Some Perspective?

Last week we talked about how times can change from week-to-week. With regards to the somewhat "disappointing" jobs report released recently, we have to reach back almost a decade to understand how our perspective changes over time. The economy lost approximately 8.7 million jobs during the Great Recession of 2007 to 2009. Since that time, the economy has added over 11 million jobs. The unemployment rate peaked at 10.0% in October of 2009. It currently stands at 5.1%, near the 4.5% bottom it hit before the recession took place.

Keep in mind that this does not mean we have recovered completely. During this time the country has added tens of millions to our population and therefore we have not recovered all jobs lost. Why is this perspective important? Because the Federal Reserve Board will be considering long term trends when they make a decision regarding raising rates this week. Yes, the latest report is important, but not as important as where we are headed. And therein lies the problem. The Fed can't predict where we are headed either. For that the Fed would need a crystal ball and they don't have one of those.

Certainly, the gyrations of the stock market will be considered by the Fed. And not only our stock market, but markets all over the world and especially in China. Is our market correction due to the possibility of the Fed raising rates or the fear of an economic slowdown spreading to our shores from overseas? One trend should be noted: short-term rates have risen during the past several weeks and this tells us that the markets are expecting some action from the Fed. Though short-term rates are not as "visible" to the consumer as longer-term rates that determine the value of fixed rate home loans, short-term rates do determine adjustments for those having variable rate home loans and this trend bears watching.


Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

My How Times Change

You may be thinking that we are talking about how the world has changed over the years. For example, who would have thought that a conversation with our children would most likely occur through texting on a machine that many of us did not even grow up with years ago? Here we are talking about how things change from week-to-week. During the past few weeks we have been illustrating factors before and against a rate increase orchestrated by the Federal Reserve Board, whose "Open Market Committee" meets next week.

On the plus side we had a strengthening economy and the creation of jobs. On the negative side we had a correcting stock market, a stronger dollar, a slowing economy overseas and plunging oil prices. In just a couple of days, the stock market rebounded significantly, we had a significant upward revision in the estimate for our economic growth in the second quarter and oil prices rebounded sharply as well. In a matter of a few days, we went from not at all expecting a rate increase to thinking that a rate increase could happen. Just to make things interesting, a few days later, stocks and oil prices reversed again. If you are confused, think how the Fed must feel considering this decision.

And then came the jobs report. What did the jobs report tell us? Even though the addition of 173,000 jobs was less than expected, the unemployment rate dropped to 5.1%, the previous month number of jobs added was revised upward and wages grew a bit more than predicted. Overall, this report is a positive one for the economy and, therefore, increases the chance of a rate increase next week. Most analysts are putting the chances of an increase at 50-50 right now. Though, one thing we can tell you is that the Fed does not like major uncertainty. And there is plenty of uncertainty out there right now. Too much uncertainty may be the overriding factor determining the results of this decision.

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

Lower Gas Prices on the Way?

Even before the Iran deal was announced, market analysts were predicting that lower gas prices were on the horizon. Certainly, the optimism over the Iran deal has increased this speculation. In reality, the deal might help more Iranian oil get to western markets, yet we know that this agreement still has to go through the "political process." That does not stop optimism, and CNN/Money recently published a story saying that we could see gas prices at $2.00 per gallon, especially after the summer driving season comes to an end.

Again, even without the deal being implemented, analysts were bullish on lower gas prices as world production was rising. The next question is--will that hurt or help our economy? On the plus side, lower gas prices should bolster consumer spending, while lowering the threat of inflation. This could help moderate future rate increases. On the negative side, our energy sector would be negatively affected and areas dependent upon those sectors would be hurting as well.

The overall effect would definitely be positive. We should remember that the energy sector affects all industries. There has even been a recent study that has indicated that falling gas prices can shorten the time it takes a house to sell and can increase the selling price. The study was published by Florida Atlantic University and Longwood University. We certainly understand that lower gas prices can affect demographics with more moving closer to cities when gas prices are higher. Will gas prices fall and by how much? That remains to be seen but the possibility is intriguing. 

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com

Is a Correction Coming?

We are approaching almost three years since the last time the stock market underwent a classic correction, which is generally defined as a pullback of at least 10 percent. According to CNN/Money, a correction happens on the average of about every 18 months. Thus, statistically we are more than due at the present time. Note that we are not talking about the end of the bull market which has lasted over six years. The question is: will this correction come in the second half of the year?

For the first half of this year, the stock market has treaded water. This is in contrast to the rest of the bull market in which gains have averaged close to 15% annually for the previous six years. One could argue that this "breather" is a correction, even though there is not a classic loss in value. Another question follows: Why would stocks be stagnating when the economy is picking up steam? Right now there are two factors holding back stocks -- higher rates and international pressures, most recently the crisis in Greece. It is not surprising that stocks are weak in light of the issues Greece and Europe are facing. Interest rates and oil prices have also fallen as the crisis has unfolded.


As for rates, stocks have long benefited from super low rates. Now that rates may be rising in the long run due to a better economy, that benefit may be reduced. Of course, it is not like rates are high right now, especially from a historical perspective. Just keep in mind that rising rates do not affect only the real estate sector. They can have a profound influence on all markets. Right now rising rates are actually benefiting real estate as consumers rush to purchase homes to beat the rate increases.  

Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 
mike@mikeervin.com