The Fed That Can’t

admin 0 comments 01.08.2015

As I mentioned last month, there would be no rate hike in September. While the imputed odds from the interest rate futures market were 1 in 4 as the meeting began, I gave it 1 in a million. No way should the fed tighten until emerging markets economies pick up. Why is the Fed holding steady as critics continue to argue (wrongfully) that they are behind the curve? The answer is not China. The answer is not Greece. The answer is.......Japan! Japan has been in a multi-decade depression brought on by a real estate and stock market bubble that popped in the 80s. Ever since, their interest rate policy has bobbed and weaved with every sign of strength and weakness in the economy. In 2001, Japan essentially invented quantitative easing. Simply put, this is bringing real rates below zero by buying mortgage backed securities. One crucial mistake they made along the way was raising rates on and off when signs of any strength appeared. The fed knows this is a recipe for disaster, which is why they have not raised rates in almost a decade. 2015: Just when our economy started to show signs of growth, the "emerging market" bubble popped. The world now finds itself in a DEFLATIONARY environment. While the USA is still hanging in there, there is no way the Fed can risk joining Europe and China and other emerging markets in a deflationary spiral. If this has been too technical, let me put it in plain english. The Fed can't and won't raise rates until the world economy is growing again. Despite all the talk, rates will stay low for a long time. What are the implications? For borrowers it is good news. If you have been unable to refinance , you still have plenty of time. For flippers and short term holders, your variable will suit you just fine. Even if the Fed is pressured into a 1/4 point rate increase at some point, rates will stay subdued for some time. For real estate prices this is good on the surface, if rates were the only factor in pricing. One leg of the stool is being pulled out as we speak. The foreign money that has added to demand here at home could quickly evaporate for several reasons. 1. Oil rich countries such as Russia who have been huge buyers of US real estate are hurting as oil has plummeted 75% from the highs. 2. The strength of the US dollar is making our goods and services more expensive hurting our exports. This could have a negative effect on our economy and our job growth. 3. The strength of the US dollar makes our real estate more expensive to holders of devalued currencies. The conclusion I draw is simply this. Trees do not grow to the sky. Most real estate booms end because of a spike in rates. Low rates should continue to support present prices. However, as the stool has lost a leg or two, don't be surprised to see a slowing of the mania that has fueled this recent real estate bull market. I am not talking 2008 or even 1993, both brought on by massive leverage. I will stick my neck and say a combination of less foreign money and a slower world economy will at the very least bring supply and demand into balance. 2016 will likely be a flat year, which after all isn't a bad thing. We do not need another bubble like 2006 to end as badly as 2008. A soft landing for the recent real estate mania seems to be the most likely scenario. Real estate and stocks remain the path to wealth building for the long term thinker. That is unless you think your .00001 return on your bank deposit will support a comfortable retirement. It has been an amazing run, time to stop and take a little time to breathe.

August-2015

admin 0 comments 01.08.2015

No doubt you have heard much about world economic events. ANOTHER Greek bailout. The China miracle becoming a bit less miraculous to say the least. Europe as whole, fighting to fend off their recession from reaching depression status. The US dollar soaring to multi-year highs.

So, who cares? How does this affect me? First, the good news. The deflationary pressures on the world economy have helped to keep interest rates at or near historic lows. While the fed has indicated that it will soon bump rates by a quarter, it is unlikely that there will be a pronounced rapid increase in rates. Now, the bad news. As the dollar soars, US goods become less attractive to foreign nations. Not just goods. Think REAL ESTATE. One of the hallmarks of the recent surge in real estate prices has been "cash buyers'. Many of these cash buyers were foreigners smart enough to hedge their portfolios with assets backed by a strong currency.

But now the currency has become so strong, it is massively more expensive for foreign nationals to convert their falling currency to dollars to purchase real estate. For these reasons, Florida has seen an abrupt slowdown in activity. Latin American buyers are drying up as are Russian and Eastern European buyers. While that is far from here, Asian money is drying up as well. That does not bode well for US exports, which could very much affect our economy.

How about South Bay real estate? Is it driven by foreign money? For the most part, no. However there is a trickle down effect. Just 13 miles north, Santa Monica income real estate has been dominated by Russian money. Don't expect that to continue. All of this has a spill over effect. I cannot say when. I would be disingenuous if I said I could. But the bullet train will need to make a stop to let a few passengers off.

Locally, we have seen less cash buyers, less multiple offers in the last 3-4 weeks. There are more properties listed. The "shortage" of inventory is beginning to balance out. That is good news for buyers. By no means, are prices declining. To the contrary, prices are still rising, albeit at a seemingly slower rate. As I have mentioned before, we are not approaching another 2007, which was caused by massively loose lending standards and sub, sub sub prime borrowers. However, we are due for a cooling off, and there are beginning to be signs that it may come sooner than later.