Outlook 2015 - Making Sense Of The Markets

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Outlook 2015:Making Sense of the Economy and Current Markets

Four Relevant Drivers for 2015

• Economic Environment

• Stock Indexes and Interest Rates

• Housing Market Conditions

• Mortgage Changes and Regulatory Environment

©2014 Opes Advisors, Inc. All rights reserved www.opesadvisors.com 2

Plan for More Growth

US Economy:

• Economic indicators all point to growth opportunities for the remainder of 2014 and into 2015. The new unfilled orders, strong financial position of the consumer, leading indicator upward trends and likely ongoing low interest rates will continue to fuel the growth of the US economy.

• Annual Employment finished 1.2% above last year through August; there are now 145.3 million individuals employed in the US; highest level since late 2008. The seasonally adjusted unemployment rate has fallen to 5.8% as the overall economy continues to strengthen.

• The S&P 500 Index set a record in October closing again above 2000; it is 14% higher than one year ago. Corporate profits are up 15% higher year over year if you ignore the financial services sector. We still see single digit gains for 2015.

• The gradual rise in housing prices nationally is pulling asset prices up opening up the possibility of refinancing and selling of homes previously under water; and increasing movement of people toward areas with more jobs. Housing is stabilizing nationally, and areas where bubble like symptoms arose, we see this dissipating somewhat in Q4 and Q1 of 15. Global growth fears and volatility in the stock market will slow this rise down.

• Inflation remains largely in check, consumer price index up 1.6% above a year ago, but we look for this to level off with commodity prices, global slowdowns and US Oil and Natural Gas production.

• Housing Starts ended 2013 18.3% higher; 2014 is projected to end up 8%, 2015 to still have further increases to 9% and then level off. Millennials will be in the market in the next five years.


Plan for More Growth

Bay Area Economy:

• E-Commerce Retail Sales are growing at a robust pace, up 16.2% over the past 12 months, far exceeding growth in other retail sectors – bodes well for our local economies.

• Unemployment has dropped from above the national average to below it over the past two years. Growing local economy continues; San Francisco Metropolitan Area unemployment 5.0 and San Jose 5.2 as of September, compared to the national average, US at 5.8%.

• High Tech and Social Media generating local positive effects with their stock market value, restricted stock unit values, and bonus plans. This continues to have a positive wealth effect for local communities; we have the leading innovators in consumer electronics, social media, search engine (and possibly driverless cars), and automotive manufacturing.

• High paying jobs have increased; we have specific requirements and roles fulfilled uniquely in our Silicon Valley Area; we do not see this pattern changing and see Venture Capital Investments continuing at a strong level.

• Rising home prices and increased jobs and wealth, have brought buyers off the sidelines, although we will have seasonal adjustments in prices and demand we do not see an overall change in our markets or permanent decrease in demand. We do believe that the slight rise in rates, and lower affordability rates will put a ceiling on the steep rises in some communities.


Four RVenture Capital – Investment Higher and Local83% More Investment than any other Region


Bay Area Housing and Mortgages

Current Sales, Prices and Trends:

• A total of 7,693 new and resale houses and condos sold in the nine-county San Francisco Bay Area in October 2014. That was up 3.4 percent from 7,443 in September and up 1.3 percent from 7,595 in October 2013, according to CoreLogic DataQuick data.

• The median price paid for a home in the nine-county Bay Area in October 2014 was $601,000. That was down 0.5 percent from $604,000 in September, and up 11.3 percent from $539,750 in October 2013. The median sales price peaked at $665,000 in June and July 2007, then dropped to a low of $290,000 in March 2009. We are currently within 9% of the peak prior to the crisis with interest rates over 2.5 points below the peak.

• Jumbo loans, accounted for 55.3 percent of last month’s purchase lending, up from a revised 54.7 percent in September and up from 47.8 percent a year ago. Jumbo usage dropped to as low as 17.1 percent in January 2009.

• Adjustable-rate mortgages (ARMs), an important indicator of mortgage availability, accounted for 24.0 percent of the Bay Area’s home purchase loans in October.

• The typical monthly mortgage payment that buyers committed to paying was $2307. Adjusted for inflation, last month’s payment was 20.4 percent below the typical payments in 1989; the peak of the prior real estate cycle. It is 41.2 percent below the current cycle's peak in July 2007.


Stock Indices’ Strong Correlation with Bay Area Real Estate PricesS&P and Dow Jones Returns single digits 2015


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Our Projection for S&P Returns high single digits

Bay Area Median Home Prices up from lows in step with S&PS&P Returns up 220% since the lows of Mar 2009

Affordability in Bay Area Down From PeakQ1 2006 – Q2 2014 Housing Affordability Index


The graph above illustrates the percentage of households that can afford to purchase a home in their respective regions.

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California United States San Francisco Bay

3 Key Interest Rate Drivers


10 Year (Benchmark) Treasury Yield at 2.35%

DRIVER INDICATOR

Fundamental• Supply, Demand and Inflation

Expectations

Monetary Policy • Fed Reserve Commitment and Actions

Technical (Trend) • Secular (Long Term) Cycle

Let’s look in more detail at the Drivers and 2015

Current Monetary Policy (Fed Actions)


Direct Influence on Short Term Rates

As a Major Investor

• Fed sets the Discount Rate – rate banks borrow money from Federal Reserve bank and while speculation is rampant; this is expected to rise middle of 2015.

• Fed Funds Rate – rate banks charge each other for overnight loans, directly influenced by Fed increasing or decreasing required ratio of reserves to deposits

• Current situation, the Fed completed with their purchasing of treasuries

• Reinvesting Maturities of long term Treasury debt is still happening and can stop if the Fed wants to limit stimulus before raising rates

• Currently, Fed actions have stopped purchasing additional bonds, and could begin to raise short term rates 2015; we believe if growth continues could happen by Q2.

• Volatility will follow if the Fed raised short term rates. Supply and Demand will have the most influence on longer term rates.

Long Term Trend - Clues to Future Direction

• Trends are marked out by long-term directional ranges in interest rates. o Changing the trend requires a major change in policy or economic circumstances.

• While interest rate movements appear large at the time they are occurring, a longer term perspective demonstrates how frequently and to what degree interest rates move up and down.

o Despite varying opinions to the contrary, technical trends suggest the limits of how far rates may shift around, at least until something major shifts differently than outlined in this presentation; the long range trend holds.

• There has been a long rate trend downward in interest rates. The rise in rates in 2013 along with the 2014 drop in rates is consistent with a sideways trending market. And while recent rises may signify that the long term downward trend is ending, it doesn’t mean it will rise to interruptive levels.

• As you will see from the next slide, we are entering a new phase of a range bound interest rate cycle.

We believe rates will remain in this fairly low band for a while.©2014 Opes Advisors, Inc. All rights reserved www.opesadvisors.com 11

Rates to Remain Range-Bound


10 Year Treasuries and Mortgage Rates


Rate Forecasts Next Four Quarters

10 Year Treasuries

December 2014: 2.11 – 2.61March 2015: 2.07 – 2.57June 2015: 2.13 – 2.63September 2015: 2.27 – 2.77

Other Key Rates:

Prime: 3.25%Fixed Mortgages: 4%-4.75%ARM Mortgages: 2.75% - 4%

Volatility Interruption When/if Fed Raises Short Term Rates

Assessment Of Mortgage Changes for 2015


Fannie and Freddie

• No movement on lowering the conventional conforming amounts; could happen toward end of 2015.

• GSE’s will continue to raise rates to encourage private investment• Further tightening of guidelines to eventually meet QM guides, each release of the new

DU has tightened DTI and qualification levels.• Stage is set to begin to combine entities in standardized security platform, though this

will not happen in the near future.

QM and ATR Requirements

• The market and our clients are adjusting to the new Qualified Mortgage rules of mortgages

• This sets the stage for new investment to finally come to market. • This will bode well for the Bay Area and any market that relies on Non Conventional and

Non QM loans for real estate purchase. These are happening now, but the pricing is not where it needs to be … YET.

• 2015 will have more product investment than all of the last eight years

Private Investment Alive and Well2015 Trajectory Change

• Asset backed lending• Asset depletion lending• Expanded Lower Credit FICO Guidelines• Self Employment Borrower Help• We see guides to continue to expand this next year in order to serve those that can truly

afford their payments


Q & A

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Opes Advisors is licensed by the CA Department of Business Oversight 4150089 under the California Residential Mortgage Lenders Act, Oregon ML-4902, Washington CL-1178435 and NMLS 235584. Equal Opportunity Lender. Opes Advisors is a registered investment advisor with the Securities and Exchange Commission (SEC).

Outlook 2015 - Making Sense Of The Markets

Economy & Finance

Transcript of Outlook 2015 - Making Sense Of The Markets