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Gary Mckae's Blog

By Gary Mckae | Agent in 94301

Will Ben Bernanke Pull a Rabbit out Of The FED Hat?

A number of forecasts are all coming together.  Let’s deal with Home Sales first.  From the last report I heard 52%, down from 56%, of homes sold in the United States last month were either REO, Bank Owned, or Short Sale classified.  More people bought new homes in March, helping give the battered real estate industry a small lift after the worst winter for sales in almost 50 years. READ


To begin with the future outlook for real estate going forward, there is an interesting report put out by the Federal Reserve.  The Report is called: “Senior Loan Officer Opinion Survey on Bank Lending Practices”.  This Report will be an indication of where we are in the lending cycle.  As banks become more confident we should see some changes in this report.


Are buyers become more confident as the economy improves while the housing market has questionable signs?  How does the prospective buyer judge what direction to take?     The people at CNBC have another bit of information that they have gathered from Real Estate Moguls, READ IT HERE. 


From the April 22nd issue and the comment on rental housing, the Wall Street Journal now gives credence to my first comments from late last year that rental housing was a great investment!  How about rents are rising and we are in a Bull Market in Rental Housing?  Nationally, rents have moved from $930 in 2006, pre crisis, to $991 today and the forecast is $1025 in 2012.  READ


Strong demand in rental housing was really a “gimme”.  Too many people lost homes.  They had to live somewhere.  Even those who sold and decided to wait to buy by renting are finding themselves in a hole of higher rental prices as their leases mature.  You must look at diversifying your investment portfolio if you feel too top heavy in equities.  If you are fearful of your bond or fixed income portfolio declining when QEII ends, real estate as an income investment couldn’t be at a better point for rising rents and eventually rising property values, A GREAT INFLATION HEDGE.


That leads me to rents as part of the inflation figures and a reader’s comments to me from a Bank of America commentary in that there is no inflation.  We heard from Ben Bernanke’s first FED news conference the word “inflation”.  We heard it several times to note that Mr. Bernanke is now looking down the barrel and sees that “Inflation” is popping up its head.  How far in the distance?  It could be as soon as next year, IF THE WALL STREET JOURNAL IS CORRECT.  If rents are up and it creates 4% increase in inflation annually, that means it goes from 0% to 4%, it will have a meaningful impact on the formulae the FED uses to monitor inflation and to make decisions on interest rate direction.  From the Wall Street Journal article the statement was a move from $990 today to $1012 in 2012.  that is a $22 increase per month or a 26% annual increase.  Is that inflationary?  I think so.  So, why isn’t Ben Bernanke worried?  What will offset the increase?


Commodity Prices could come off their highs and we will see greater profits from the manufacturing sector as their productivity savings are further enhanced by raw material savings.  Why would that happen?  It has to do with commodity prices.  The reason was a weak US$ and foreign demand.  The weak dollar transferred into higher prices for internationally quoted products as local currencies appreciated at the cost of the US$.  All the Asian Economies and the including Brazil as Latin America’s Growth Economy all prospered and their currencies appreciated against the US$.  Due to demand from them there was some appreciation in unit cost of raw materials.  The quoted cost in US$ further increased due to the exchange rate adjustment.  That had a minimal effect in the US as we were still struggling out of our Great Recession.  Our economy was not a buyer of our manufactured products.  The offshore was the buyer.  As inflated commodity prices were put into manufactured products purchased offshore those countries began to see inflation ramp up and they began to temper their growth by raising interest rates; as an example, in China and Brazil. 


We now have their economies throttling back and our economy beginning to revive.  The big question will be what could cause inflation here?  Higher commodity prices or the present high commodity prices cannot be covered by increased productivity.  The other one is interest rates.  Interest rates are abnormally low we are told.  There has been a great deal of commentary, including myself, on the forecast of higher interest rates once QEII end on June 30th.  Interest rates are tied to the weak US$.    What if the US$ strengthens and interest rates do not rise?  


That takes me to an interesting statistic I heard of on the total amount of bank debt maturing this first half at the banks.  The total amount of C&I, Commercial and Industrial, loans maturing is $2 trillion.  The total amount of Quantitative Easing and debt owned by the FED is $2.6 Trillion.  The total amount of US Debt owned by China is $1.6 Trillion. 


IF A BIG IF, the US Banks allow the $2 trillion to mature, where do they put it?  How about the $2.6 Trillion in mortgages and bonds the FED purchased.  No new money is printed.  No inflationary impact.  No increase in interest rates.  No inflationary impact.  A REVERSE REPO on a monumental scale!   The FED took on the old and toxic debt, sold US Debt to finance the healing of the capitalistic system, bought that debt back to support low interest rates and then sells the debt from FED Inventory back to the banks with matured funds from C&I Loans.  If I am right, Ben will be in that office forever!  It will be a new strategy for all Banks all over the World to use!


What makes me think this is possible?  Let’s look at the contrary indicator news. 

.                 1.China needs to guard against volatility in U.S. Treasury prices should investors demand higher returns from U.S. government debt, a researcher at the Chinese central bank said on Monday. READ

.                 2.China's central bank is considering setting up new investment funds to diversify holdings in the country's swelling foreign exchange reserves, the world's largest stockpile, local media reported on Monday.  READ

.                 3.Silver traded to historic highs Monday, taking out the $49.45 an ounce that held for more than 30 years when the infamous Hunt brothers tried to corner the market.  READ

.                 4.Economic growth slowed more than expected in the first quarter as higher food and gasoline prices dampened consumer spending, and sent a broad measure of inflation rising at its fastest pace in 2-1/2 years.  READ

.                 5.Americans' cheap money spigot remains open and the flow is as fast as ever, meaning the world had better brace for even higher oil, metals and food prices and a weaker dollar. READ


Mr. Bernanke knows too much to let us fall on our backs again.  Too many are forecasting something that is going to happen that will happen for me to believe it.


Even IF, the housing market revives itself, there is too much in inventory of REO homes for the market to run away in an upward spiral.  EXCEPT, HIGH END HOMES, that side of the market never ran away as did the low and median price homes driven by easy money in the Pre-Crisis Era.  The high-end market will be strong and that market will see higher prices, but that market will affect median home prices.  Median home prices will slowly increase while REO inventory will still keep a lid on prices.  There will be a sense of recovery while there will be none in the prices of middle to low end homes.


There will be a great deal of adjustment in thought as we move toward June 30th.  The earnings season is over and a lid will be placed on the stock market, bonds will go no where and neither will rates.  The concept of “Sell in May and Go Away” could once again prove correct.  The stock market could continue to see appreciation in mergers, takeovers and buy backs. Now is the digestive phase.  The Asian Economies and LAtin America will slow down as they all try to curb in their inflation. 


Finally, some thanks to Osama’s demise in the form of Fortress America is the safe haven when the world looks at the terrorist card again.  Pakistan is not a real trusted ally, India is back on the favored list.  Adjustments are need throughout the Middle East.   The monied people there will look at a home in the US, mainly west coast, as their safe haven. 


It all goes down to looking at the last Great Recession, after 1974, to determine your investment strategy.  


Here is the report on sales in the last 14 days for your review.  I have included Townhouses/Condo’s in the report.  We continue to see over bidding in homes and the DOM, Days On the Market,as old inventories are liquidated.  In comparison look at 98% of sold versus original compared to 85% from last report.  DOM has increased as more older listings dominated the sell list of this report.  inventory is declining and not being replaced.  The one exception is Portola Valley where I see a very large list of for sale properties than i have seen in the past.



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