Thanksgiving

Thanksgiving arrives this week. Every year, this is the day we reserve for giving thanks. Certainly, in our country we have much to be thankful for. We are one of the richest countries of the world when you measure by per-capita income, and perhaps the richest when you measure per-capita income against the size of our population. But it is not all about riches. It is also about our freedom and democracy. Yes, the recent political campaign turned a lot of people off, but how many would opt for the alternative of not having the right to vote? 

On the other hand, it is easy to look at the aggregate numbers and forget that these averages can hide the millions who are not as fortunate residing right in our own country. And certainly, Thanksgiving is the time that our focus upon charity is also renewed. What makes our country great is not only our riches, but also that we are a leader with regard to charitable giving as well. Thus, we hope everyone will take some time to share, donate or volunteer during Thanksgiving week.

As important as Thanksgiving is, the economy marches on in the wake of the election and with an important meeting of the Federal Reserve Board's Open Market Committee meeting coming in December. The recent spike in long-term interest rates has been concerning for many market watchers, especially since this spike is accompanied by concern that inflation will be on the rise. The question is whether this rise in rates is an overreaction to the surprise result of the election, or are their more fundamental long-term changes coming our way? This will be a topic we will analyze during the coming weeks.

Are Americans Addicted to Low Rates?

You can't read or watch the news and not view a story about some type of addiction in America -- whether it is common substances such as caffeine, legal prescription drugs such as pain killers, or illicit drugs such as heroin. But today, we ask a question about addictions and our economy. Are we hooked on low interest rates? Perhaps we are using too strong a word to describe the situation, but it seems like we have gotten pretty used to historically low rates during our economy recovery.

Why do we think that we are getting too used to low rates? For one, every time there is talk of the Federal Reserve Board raising rates from these ridiculously low levels, the markets react significantly. Keep in mind that we are talking about raising rates slightly from close to zero. Of course, most Americans don't really recognize the Fed's Federal Funds Rate. But if you look at something they are familiar with, such as rates on home loans, we can see the issue more clearly. Rates on home loans averaged over 7.5% for a generation from 1980 until 2010, a period of 30 years. Now rates have averaged around 4.0% for the past few years.

What happens if rates move up in the future? Will people stop buying homes? If someone is paying 4.0% on their home loan, higher rates would make them more reticent to sell their home in the future unless there is a major life change such as marriage, relocation or retirement. And certainly, they would be more reticent to refinance as well. Thus, if rates are going to rise from these unbelievably low levels, they would have to rise gradually such as not to have a significant affect upon the economy. The Federal Reserve Board will have to be very cognizant of these possibilities as they consider their future moves.

Mike Ervin
NMLS # 282715

mike@mikeervin.com
www.mikeervin.com
(650) 409-8794 Direct

(650) 766-8500 Cell

Corporate Profits

Recently we have been discussing a variety of factors affecting the markets. These factors have included oil prices, the international economy, terrorism, inflation, job growth and more. When there are so many other important things going on around us, sometimes we neglect to focus upon factors which are not a major explosion, but give us a good reading as to the direction of the economy and the markets. That is why this week we are talking about corporate profits.


Our first quarter has ended and major companies have been reporting their profits for several days now. Corporate earnings growth fell throughout 2015. It is no coincidence that the stock market rally stalled last year and interest rates stayed lower than we expected. Stocks were volatile in the first quarter of this year, but by the end of the quarter, things were pretty much where they were for the past year -- which is flat. And rates are still lower than expected.


Certainly corporate profits are a function of the economy and we expect a stronger economy to boost profits. Thus, the first quarter's earnings reports are being watched carefully in this regard. The price of commodities, especially oil, has really hurt profits in the energy sector. You can see how inflation, the economy and all of these factors are intertwined. Thus when the Fed meets next week, they will also have a fresh batch of data in the form of earnings reports. And if these reports continue to be weak, there will be less chance of a rate increase. It is not the only factor, but certainly one to watch this month.

Mike Ervin
NMLS # 282715mike@mikeervin.com
www.mikeervin.com
(650) 766-8500

Will the Fed Increase Rates Next Week?

The numbers are in and it looks like the world financial situation is not affecting our economy's job creation. This gives the Federal Reserve Board food for thought going into their meeting next week. As we indicated earlier, many analysts originally thought this would be the month the Fed raised rates again, but market volatility and international concerns tempered these thoughts.

The economic news leading up to the jobs report was pretty solid as well. There was an upward adjustment in the measure of the fourth quarter's economic growth and solid growth in orders for durable goods, existing home sales, personal income and consumer spending. Not all the news was positive, as new home sales faltered, but new home sales were coming off a month in which we saw a very large increase in sales.

All in all, the increase in jobs of 240,000 shows that the economy is continuing to move forward, which means that we are moving towards another rate increase by the Fed. Looking at the big picture, the stock market's recent rally and the rebound in oil prices are all giving us the same indication. However, that does not mean that the Fed will definitely be increasing rates when they meet next week, especially considering the fact that the increase in wage growth was tame. But certainly, it puts such an increase back on the table.

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

Another Important Jobs Report

Every month watching the release of the employment data is interesting. However, with the Federal Reserve Meeting coming up in just a few weeks, the jobs report will take on a special meaning. It has been a tumultuous start to the year with stocks, oil prices and interest rates moving lower in tandem. Before the year started, many were predicting the first rate increase of the year by the Fed at the March meeting. Now most analysts have changed their tune in this regard.

We should not assume that the Fed has changed their mind. We have already seen stocks trying to rally and a pick-up in consumer inflation for the first time in a while. Add a strong jobs report to the mix, and the speculation about the Fed will start up again. That does not necessarily mean that the Fed will raise rates in March, but even a strong statement about the health of the economy might be enough to affect the markets.

One thing is for sure -- the markets are always changing and the changes can come quite rapidly. Thus, we should not take it for granted that stocks are going to have a down year and interest rates are going to hover at record lows all year. This means the markets will be watching the jobs report closely for any evidence that the economy is still producing enough jobs per month in order to put upward pressure on wages.

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

Some are enjoying the sale

While many are not too happy about the stock market retrenching and others who work in the energy industry are suffering through a retrenching, much of America is enjoying the sale going on right now. What is on sale? Gasoline and home loans. If these gas prices hold, we would expect a very busy summer vacation season and this should boost the economy. The American Automobile Association has indicated that the price of gas is now averaging over $1.00 per gallon less than the highs hit in 2015.

Lower than expected rates on home loans are fueling an increase in refinancing by homeowners. In mid-February, the share of applications for home loans which were refinances hit over 60% of the total market. Refinancing also puts more cash in consumers' pockets. With the spring real estate season about to start, it remains to be seen whether low rates will also boost home sales. We will add our own speculation.

We believe that if the economy continues to produce jobs near the same rate it did in 2015, and if rates stay low, this could be a banner year for real estate. The only issue holding back real estate sales is the lack of inventory. We expect builders to ramp up to meet the demand produced. The bottom line is that owning is cheaper than renting in most areas of the country and the sale on home loans has made homeownership even more affordable.

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

Is The Stock Correction The Fed's Fault?

Stocks have had a rough start to the year and many analysts are blaming it on a slowing economy, especially in other parts of the world. We think that the Federal Reserve Board deserves some of the credit for the weakness in stocks. We are not saying the Fed was not justified in raising rates. However, it is likely that some investors involved in the equities market must have come to the realization that the party might be over when it comes to borrowing at such low short-term rates.

Did the Fed react too quickly with regard to moving rates up? It is hard to fathom this since they left rates so low for so long. And they warned us for a year that the rate increase was coming. Still, we do get the impression that the bad news around the world could have swayed the Fed to wait another few months. It was almost as if they had said that rates were going up "this year" so many times, they only had one more chance and that was the December meeting.

On the other hand, the last jobs report moved our unemployment rate to 4.9%, which is the lowest in eight years. The economy produced 150,000 jobs in January and still the markets were disappointed in the number. The news on job creation is evidence which supports the action by the Fed to move rates upward, even if ever so slightly. Though the stock market may be reacting to the world-wide economic slowdown, there is also more than just a small possibility that the specter of higher short-term rates also is factoring into the equation. 

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