The Oil Factor

We have addressed the price of oil several times in the past year or so. Thus, we should have had most of the issues on the table. However, each time we speak about the price, a few months later, the price of oil goes down again. First, we must say, that we don't feel that the price of oil will go down forever. While we are not trying to predict the bottom, it is likely to come sometime this year, if we have not seen it already.

In the short run, the low price of oil helps many consumers and therefore helps the economy through increased spending in other areas. At the same time, companies in the energy sector will suffer layoffs. Also, some regions of our country will suffer, as well as many countries that depend upon oil revenue for their economies. If oil prices rebound, the effects will be short-lived. But if oil stays low, the effects will become long lasting, including the affects upon consumer behavior.

For example, the type of cars people purchase. Especially now that cars have become more fuel efficient, expect to see more SUVs and larger cars on the road in times that gas prices are low. In the long run, if the price of gas stays low, it may also affect home buying habits. With prices rising to unaffordable levels in many central cities, it is predicted that many will again look to the suburbs for lower cost housing. And lower gas prices may very well facilitate this trend in the long run. It is expected that if millennials move to the suburbs, they will be looking for developments that resemble conveniences of cites, such as town centers. Thus, the price of oil bears watching for many reasons.

Mike ErvinNMLS # 282715W.J. Bradley Mortgage
mike@mikeervin.com
www.mikeervin.com
(650) 451-7797
(650) 766-8500

The Stock Market Factor

It has been more than two weeks since the first trading days of the year, but the world is still reverberating from those first few days. What apparently started in China spread around the world as stocks, which have enjoyed a great run since the recession, finally ran out of steam. It took only a few days for U.S. markets to move into correction territory as the losses felt the first trading week were the worst ever for the first week of the year. Putting this in perspective, stocks moved down over 10% below their peak, but are up over 100% since the trough of the recession some years ago.

Even though last year was a wash, stocks have not really had a sustained correction for almost five years, the last being in the summer of 2011. All other dips have been accompanied by almost immediate recoveries. Thus, these numbers should not be scaring anyone, at least for now. While we can't predict the future, it is right to ask what this correction means, especially if it is sustained for any length of time. For one thing, with our economy producing jobs at a healthy rate, if the markets are predicting an economic slowdown, that slowdown is not evident right now.

The question is, is the slide because stocks need a breather, or are slower times coming? And if slower times are coming, what does that mean for the Fed's plan to raise rates again this year? When stocks took a hit, long-term rates moved down and so did oil prices. Both of these factors help the economy, but low oil prices are hurting some sectors and some other countries. Finally, we are seeing what a wild card the world economy and world conflicts can be. No one can predict the next international incident and the consequences of such an incident. The conclusion? It looks like 2016 is going to be a wild ride, so hang onto your hats! 

Mike ErvinNMLS # 282715W.J. Bradley Mortgage
mike@mikeervin.com
www.mikeervin.com
(650) 451-7797
(650) 766-8500

So The Fed Increased Rates

Many analysts weighed in regarding the "after-effects" of the first rate increase by the Federal Reserve in almost a decade. At least initially, these predictions seem to be bearing out. For example, according to Freddie Mac’s chief economist, Sean Becketti, interest rates should remain at “historically low levels” throughout 2016, in spite of whatever moves the Federal Reserve is expected to make. “We take the Fed at its word that monetary tightening in 2016 will be gradual, and we expect only a modest increase in longer-term rates,” Becketti said. “Mortgage rates will tick higher but remain at historically low levels in 2016.”

Yes, we experienced the first increase in the prime rate of banks in almost a decade. But with regard to long-term rates, these rates have barely moved in the weeks after the Fed's action. The rate on the 10-year Treasury note averaged 2.26 in November. On January 5, the rate was 2.25. Of course, world events have intervened to help lower rates as well. Keep in mind that if the Fed continues to raise short-term rates in 2016, it is expected that long-term rates will eventually drift upwards. This would include an increase in rates on home loans.

However, though many are expecting more increases, intervening events around the world may very well tie the hands of the Fed with regard to their ability to move as quickly as some are predicting. Domestically, the most recent employment report released Friday is a good indicator of future activity absent of such world influences. The increase in jobs of almost 300,000 was another sign of strength, and it will help bolster the Fed's plans. The message? Though rates are low right now, those who wait too long to purchase a home may be paying a higher price for that home and higher financing rates as well.

Mike Ervin
NMLS # 282715
W.J. Bradley Mortgage
mike@mikeervin.com
www.mikeervin.com
(650) 451-7797
(650) 766-8500

Happy New Year

Seinfeld spent just about a whole episode discussing how late in the year it is appropriate to wish someone "Happy New Year." I promise this will be my only Happy New Year message. But I do have a similar economic question to ponder as we enter the year. How long until we know what type of affect the Federal Reserve Board raising rates will have on interest rates and the economy?

Some of the effects are immediate. The prime rate was just increased by banks for the first time in almost ten years. For those who have home equity lines of credit on their homes or credit cards based upon their bank's prime rate, rates will go up immediately. A small increase of .25% on a $10,000 balance amounts to only a few dollars per month. If the Fed continues to raise rates this year, these effects will be multiplied, obviously.

The affect upon real estate is quite different. Most home loans are fixed rates and thus based upon long-term interest rates which don't necessarily increase at the same pace as the short-term rates the Fed are raising. According to Freddie Mac’s chief economist, Sean Becketti, interest rates should remain at “historically low levels” throughout 2016, in spite of whatever moves the Federal Reserve is expected to make. While any increase in rates on home loans is certainly not good news, we have to remember that rates are still at "historically low levels" as Becketti says, and the fact that the Fed is taking action means they have confidence in the economy. If the economy continues to expand, real estate will continue to thrive as will the economy, despite the Fed's moves.

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

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