The stock markets finished the day up 421.28 points yesterday preceded by a good day before that. It was the largest 2 day gain we have seen in over 3 years. So what's everyone so happy about? The Federal Reserve issued their monthly Federal Open Market Committee meeting Press Release where they basically gave all good news.
1. Economic activity is expanding.
2. Labor market conditions continue their improvements.
3. Solid job gains.
4. Lower unemployment rate.
5. Household spending is rising moderately.
6. Businesses are expanding their fixed investments (i.e. their spending money).
7. Recovery in housing continues.
8. Measures of long-term inflation remain stable.
Sounds good to me. There was basically no bad news in the Press Release. But, in addition to that, there were 2 key phrases that the stock market cheered. The first was "The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace...". What this means is that the Federal Reserve will continue to keep interest rates low. The stock markets keep thinking that if the economy continues to improve, the supports that the Fed has put in place to carry the economy through the latest recession...mostly keeping interest rates low and buying lots of mortgage-backed securities...will begin to end. Every time the Fed says things will continue, Wall Street looks at it as free money.
The second phrase in the Press Release from December 17th was "...the Committee judges that it can be patient in beginning to normalize the stance of monetary policy." This means, first, that the current policy isn't normal. For interest rates to be this low and for the Fed to be investing so much money in buying MBS', is unusual. It was a response to an economy in recession. Most are defining now that the Recession began in December of 2007 and ended in June or July of 2009. But, you see, that's really the point. That is really why Wall Street continues to cheer inaction by the Fed. The Recession ended 5.5 years ago and the Fed continues to prop up the economy. There are all sorts of questions as to whether or not the gains in the economy are real are just based on the Fed's loose policy. But that's not what I'm here to answer for today.
The news from the Fed is great for real estate because it means that those First Time Homebuyers who have been sitting on the fence, either because of the lack of confidence in their own job status or because of their doubts about the real estate markets, it gives them more time with lower interest rates to get in the game. This is what will really bring some stability back to the markets. While we have worked through most of the distressed sales (foreclosure activity continues to decline back to normal levels and Short Sale activity continues to decline) the last piece to add to get us back to stable growth is adding this First Time Homebuyer. The Millennials are the ones who don't seem to be participating yet and that is understandable. Millennials were the largest buyers of homes during the most recent housing boom/bust cycle and it would tend to be reasonable to say that they then were the most heavily burned. But even if they did not participate or get burned by the recent market crash, they sure saw the pain first hand. Lack of jobs, moving back in with Mom and Dad, rental rates skyrocketing and heavy Student loan obligations and a continued tight lending market are all reasons for this group to not prioritize housing.
But the Fed's stance on keeping rates low keeps the window open for this group to jump back into a market that has always served our nation and our local communities well. In Ventura County, in cities like Camarillo, Thousand Oaks, Newbury Park and even Westlake Village and Santa Rosa Valley, home-ownership is one of the things that creates stability and community. It is the American Dream. Even though it costs more today than every before, I still believe in the benefits of the American Dream and, apparently, so do the people who serve of the Federal Reserve. We thank you for your patience.
