October 27, 2005

The clock is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 96 days before the new Fed Chairman Ben Bernanke takes office.

Since June 30, 2004 the Fed Funds Rate (short term) is UP 275 basis points from 1.00% to its current 3.75%. The US Treasury 30 yr. interest rate is DOWN 84 basis points from 5.59% to its current 4.75%.

Let’s start the evening with a look at the scoreboard….On October 6th I wrote: “I know many of you are baseball fans (I think the White Sox will go all the way this year)”….I finally hit a winner in the World Series breaking a losing streak almost as long as the Sox (1917)….that’s the good news……but it appears that I am about to strike out in my call for higher corn prices…on September 22nd I wrote: “I am awaiting a major price increase in corn”…and I’m still waiting but now my kitchen at home is filled with enough corn to make corn soup, corn souffle, corn on the cob, etc. for every reader for at least a year…..my patience with corn is running out and unless we see a move back above $2.05 I will declare this my big loser for 2005. But one of my favorite quotes is: “If you aren’t making mistakes you aren’t trying hard enough” so I will continue to give my readers an honest assessment of current and future economic conditions that come from over 35 years of experience in watching financial markets.

What I have learned after 35 years??? That history does repeat itself but not when we expect….The appointment on Monday of Ben Bernanke (as I predicted) to Fed Chairman beginning February 1st has brought about predictions that he will be soft on inflation, quick to lower short term interest rates and not as powerful as current chairman Alan Greenspan. First let’s remember that the vast majority of money managers, mortgage brokers, real estate agents, etc. are under the age of 40 and as a result have only experienced one Fed Chairman in their business lifetime as Mr. Greenspan came into office 18 years ago in the summer of 1987. There are very few good things about growing old but one definite advantage is that I have lived through the terms of the last five Fed Chairmen. William Martin (1951-1970), Arthur Burns (1970-1978), G. William Miller (1978-1979), Paul Volcker (1979-1987) and Alan Greenspan (1987-2005). Look closely at these dates and you will see that we have had five Presidents (Carter, Reagan, Bush, Clinton, Bush) in the past 25 years but only three Fed Chairmen. In each of the early terms of the past Fed Chairman the bond market (interest rates) tested the mettle of the new Chairman by pushing bond prices lower and long term interest rates higher. Not many remember but when Mr.Greenspan came into office he had no previous Fed experience (Ben Bernanke was a Fed governor from 2002-2005) and long term interest rates rose 37 basis points the day his appointment was announced and then over 100 basis points in the summer of 1987 as public opinion was almost unanimous that he could NOT do the job as well as Paul Volcker and then in an effort to defend a falling dollar Mr. Greenspan raised short rates which helped cause the stock market crash in October 1987. Mr. Volcker came into office on August 6, 1979 and was greeted with one of the worst bear market’s in bond history and it took him years to gain control of what was perceived as a runaway Fed train called the “Inflation Express”. So will Mr. Bernanke suffer the same fate as past Fed Chairman??/ Doubtful because of Mr. Greenspan’s acute awareness of the past and his overwhelming desire not to deliver the next Fed Chairman the meal that he found so indigestible by his predecessor Mr. Volcker. The summer of 1987 is deeply implanted in Mr. Greenspan’s memory and one of the main reasons he has continued to raise short term rates at every FOMC meeting (next mtg. 11/01/05) is not only because of latent inflation fears but even more importantly because he does NOT want to leave Mr. Bernanke with anything but a clean plate where he can cook his own meal where the first course will be to ease (lower short term rates) in the summer of 2006.

I will be writing extensively about our new Fed Chairman and his 2006 policy but for now here are a few items I’ve collected over the past few days….

From the Contra Costa Times comes an article about mortgage bankers cutting fees in an attempt to keep their market share (this is just the start of a major trend) but more importantly the consolidation that is sure to come in 2006.
  http://www.contracostatimes.com/mld/cctimes/business/13009306.htm

For those that dabble in the stock market (I only watch) you will be glad to know that since 1926 the strongest two month period of the year is right around the corner as the November/December period ranks as #1 in performance. Maybe the Santa Claus rally is more realty than myth….

Fed Chairman Greenspan will address Congress about the state of the economy on Friday November 3rd just after the monthly jobs number is released so mortgage brokers and real estate professionals might want to stay away that day until the dust settles…..

Oil is trading tonight at $61 as it was announced that US demand for gasoline has fallen 2.2% in the last four weeks. Economics 101 teaches us that when prices rise, demand falls and that is just what is happening in the energy sector. It does NOT seem to apply in the accounting field as the price (salary) of CPA’s is rising faster than oil did this summer but the demand for CPA’s continues to grow…..

I have received many e-mails and calls from mortgage brokers this week worried about the recent rise in long term interest rates but again it pays to take your memory pills every night before you go to bed. In October of 2002 the US 10 yr. Treasury was at 4.3%, in October 2003 it was 4.5%, in October 2004 it was trading back at 4.3% and now in October 2005 it is at 4.5%. So over a three year period we have stayed in a very tight trading range of 4.3% to 4.5%. The bond market has taken one unknown (next Fed Chairman) and replaced it with another (Mr. Bernanke’s future policies) and it will take more than a few months for the market to begin to digest and understand the new Fed Chairman and how he will communicate with the interest rate market. On September 20th I wrote: “The bad news is that the bond market is NOT focused on the BIG unknown…who will be the next Fed Chairman and more importantly how will he communicate with market players?”
“This will be a MAJOR cause of interest rate volatility in the next few months and I would warn all mortgage consultants and real estate agents that this will also have an impact on real estate prices as many potential buyers will pull back and wait to see what the new Fed Chairman has in his tool bag.” Again this was written more than a month ago so everyone had fair warning….it is easy to just parrot what the press is saying…I try very hard to prepare my readers in advance of storm clouds that are on the horizon. The good news is that the inflation scare that has the bond market on its heels is just a mirage and although energy prices are higher over the past 12 months demand/consumption is lower and that is not inflation but a reallocation of consumer spending habits. More is being spent on gasoline and less on clothes, vacations, etc. Inflation only appears when the central bank is asleep and not watching monetary growth/velocity and that is surely not the case this time…..The worries about Mr. Bernanke will fade as the economics of interest rates take center stage but this will not happen quickly so just sit back and enjoy the ride..it will be bumpy but the scenery is majestic and we will all reach our destination of lower long term interest rates in 2006.

October 24, 2005

The clock is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 99 days before a new Fed Chairman takes office unless of course President Bush forgets or delays the appointment….

Since June 30, 2004 the Fed Funds Rate (short term) is UP 275 basis points from 1.00% to its current 3.75%. The US Treasury 30 yr. interest rate is DOWN 99 basis points from 5.59% to its current 4.60%.

On Wednesday August 31st I wrote: “For the third consecutive day oil rose above $70 only to find aggressive sellers and closed at $68.94. I firmly believe that we have seen a MAJOR top in the price of oil and a 20% or more decline will begin shortly after Labor Day.” Tonight in Far East trading crude is trading at 59.96 which is down almost 15% since its peak a few days before Labor Day. As I predicted the high price of oil has caused a cut in demand and coupled with a strong seasonal trend for oil to decline into December it appears that I will hit my target of $56 in the next few weeks. With the end of hurricane season just a couple of weeks away the “fear” premium in the price of oil will dissipate and refineries in the South will be back on line so the ingredients for weaker oil and gas prices will be in place soon…..This will bring good news to the inflation statistics that have the Fed on full alert and appear to be the reason the Fed continues to raise the Funds rate at each FOMC meeting. But readers of this e-mail are well aware that I have been writing all year about the most important date in Federal Reserve history….January 31, 2006. With only three meetings (11/01, 12/13, 01/31) remaining in Mr. Greenspan’s term as Fed Chairman he has decided he can take no chances and will raise the Funds rate 25 basis points at each FOMC meeting putting the Funds rate at 4.50% which should be above the level on the 10 yr. US Treasury note (currently 4.39%) thus giving us a negatively sloped yield curve (short rates above long rates) and ending the Fed tightening. This will give the next Fed Chairman (Ben Bernanke??) an opportunity to make his first move to ease (lower short rates) sometime in the spring/summer of 2006 and giving homeowners across the US a once in a lifetime opportunity to lock in 30 yr. mortgage rates in the 4%+ range. In June 2004 when the Fed began its current tightening phase every economist and media expert predicted an imminent rise in long term rates which of course did NOT occur because the market had already discounted a rise in the Fed Funds rate. The normal interest rate cycle where the long end follows the short end is broken and actually upside down so when the Fed begins easing in 2006 it will actually mark a LOW point in long rates as these same economists and media experts will again be predicting that long rates will be following short rates lower and will miss the fact that the market again anticipated the Fed easing…..some economists never learn as they are one of the few professions that is not held to standards of accountability (getting fired for poor performance) that 99% of America is…….

In the Fed’s H8 report from Friday (10/21) showed that although commercial and industrial loans increased the heloc (revolving home equity) loans showed their first monthly decline in many years as it appears that the fear of higher short term rates has driven borrowers to fixed rate 2nd mortgages. Most importantly is that I expect new guidelines for mortgage lenders from the Comptroller of the Currency office that will make it more difficult for borrowers to qualify for the heloc loans. For those in the mortgage or real estate business I suggest you carefully read a speech from September 14th given by Julie Williams, Senior Deputy Controller of the office of the Comptroller of the Currency. I found one of the most interesting parts when she asked: “Is the bank underwriting loans based on its own prudent underwriting standards, or simply underwriting to investor standards and figuring it can later sell the loan?? Is it applying different standards for loans it plans to sell than for loans it plans to keep???” http://www.occ.treas.gov/ftp/release/BuffaloSpeech.pdf My question is what happens when current buyers of securitized home loans decide that maybe they aren’t as safe as previously thought and move their money into other securities??? Lenders might then find that they would have to “hold” more loans than they were equipped to handle and then……….But the good news for those who “need” real estate prices to continue their rise is that there is still a HUGE amount of $$$ on the sidelines waiting for any pullback and that should stabilize any decline that begins over the next few months.

Countrywide continues to grow and according to an article in the Arizona Republic they are planning to expand in Chandler, Arizona. The quote that caught my eye came from CEO and founder Angelo Mozillo: “”We’re here because California screwed up and continues to do so”…..”California sucks”….http://www.azcentral.com/php-bin/clicktrack/print.php?referer=http://www.azcentral.com/business/articles/1019Countrywide19.html

Sacramento seems to have a little indigestion with homes for sale as inventory has doubled from a year ago….http://www.sacbee.com/content/business/v-print/story/13737287p-14579258c.html

From Washington D.C. it appears that the high end of the residential home market is slowing down…http://www.washingtonpost.com/wp-dyn/content/article/2005/10/18/AR2005101801609_pf.html

It’s almost midnight and If I stay in the office any longer I will turn into a pumpkin for Halloween so tomorrow evening I will bring everyone more insight and some interesting stats on housing demand vs supply….. .

October 10, 2005

The clock has is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 113 days before a new Fed Chairman takes office unless of course President Bush forgets or delays the appointment….

Since June 30, 2004 the Fed Funds Rate (short term) is UP 275 basis points from 1.00% to its current 3.75%. The US Treasury 30 yr. interest rate is DOWN 103 basis points from 5.59% to its current 4.56%.

As anticipated Friday’s jobs number (+35M) was totally distorted by the Hurricanes and gave the Fed no new information in its continuing fight against the ghost of 1970’s inflation. It will be many months before the economic statistics can be relied upon for an accurate gage of economic activity or future inflation. Be careful because the press who must write stories daily will be trying to extrapolate every new release from Washington or Fed speech into something that has a better chance of being an illusion than a reality. The most important stat is the one at the top of this e-mail….the clock keeps ticking on Chairman Greenspan’s term in office and that will have the biggest impact on Fed policy over the next 3+ months. I again repeat as I have for the past many months that Mr. Greenspan will not leave any of the “hard work” (interest rate increases) for the next Fed Chairman (Bernanke??) because of his vivid memory of what Mr. Volker did to him in the summer of 1987.

Real estate “bubble” articles were plentiful over the weekend with the majority reporting that the number of houses for sale was increasing and prices were falling. But before everyone jumps on the wagon that “the end is here” a reminder that the weakest month of the year for house prices is September (the strongest is June) so I would wait until we see a seasonally strong month (December) to evaluate the condition of the market.

On Friday evening the ABC news program 20/20 devoted its entire show to the “flipping in Miami” that seems have people lining up to make their new fortune. In Dallas a “feeding frenzy” has builders competing for any vacant lots or tear downs that somehow are still available…. http://www.dallasnews.com/sharedcontent/dws/bus/stories/100705dnbusteardown.1c921ba3.html
In Seattle house sales and prices appear to be the strongest of the year proving the point that the house market can be “hot” in one area but “cool” in another part of the country. That’s what keeps the market moving as investors/speculators race from city to city trying to find the golden nuggets still uncovered by the masses. They are getting harder and harder to find and unless the US expands from 50 states to ??? we eventually will run out of places to find good buys….in the meantime Alaska Airlines has plenty of seats to Seattle where the market is strong….http://seattletimes.nwsource.com/cgi-bin/PrintStory.pl?document_id=2002545089&zsection_id=2002119995&slug=homesales07&date=20051007
But in Sacramento it seems that the real estate bull has left town as prices have leveled off with sales actually down 7.5% for the year…http://www.sacbee.com/content/business/v-print/story/13679315p-14521778c.html

On Friday I watched an interview on Bloomberg with Angelo Mozilo in which he stated that he wouldn’t be surprised if the price of condo’s in California dropped 20%….very interesting….if anyone has a vested interest in the bull market it is the CEO of Countrywide…….is Countrywide changing its underwriting guidelines for Calif. condos???? Did you know that insiders at the five largest homebuilding companies have sold $850 million of their stock holdings so far in 2005??? If they don’t want to hold the shares of their own companies what does that say for future house prices???

There was a good story in Sunday’s San Francisco Chronicle about individual loans made on TIC’s (tenants in common). These sell for less than condo’s and I look for many lenders to climb into this market especially in parts of the country where co-ops are many and there is resistance to condo conversions from apartments. http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2005/10/09/BUGLGF4GQN1.DTL&type=business and another about a Wharton professor who sees nothing but “blue skies” ahead for the commercial real estate market despite recent price increases….
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/10/09/REGCVF3VMK1.DTL&hw=dan+levy&sn=001&sc=1000

For those interested in commercial real estate it appears that San Francisco is seeing an increase in rents per square foot and a drop in vacancies….http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2005/10/09/BUGLGF4GQN1.DTL&type=business

Finally an important event over the weekend that somehow didn’t garner the BIG publicity it deserved….a Chapter 11 bankruptcy by Delphi the world’s 2nd largest automotive supplier ($28.6 Billion revenue). The impact on GM could be severe as it appears that they are liable for $6 Billion of pension and healthcare guarantees from it spinoff of Delphi in 1999. Could this push GM into bankruptcy before October 17th??? Is that why GM’s stock is down 20% in the last 5 days???

October 6, 2005

The clock has is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 117 days before a new Fed Chairman takes office unless of course President Bush forgets or delays the appointment….

Since June 30, 2004 the Fed Funds Rate (short term) is UP 275 basis points from 1.00% to its current 3.75%. The US Treasury 30 yr. interest rate is DOWN 101 basis points from 5.59% to its current 4.58%.

Economics 101…a simple premise that I have used over and over again in 2005 when writing these e-mails. When prices rise (oil, real estate, etc.) supply magically increases and demand decreases and when prices fall (dollar, sugar, corn, hogs) supply decreases and demand increases. This year I made a few bold predictions and so far I have been lucky enough to be batting 1000% (dollar higher, sugar higher, long term interest rates lower, short term interest rates higher, hogs higher) and a few are still undecided….(oil dramatically lower after Labor Day and corn higher). Each one of these market calls came after a lengthy analysis of supply and demand conditions both present and future and most importantly keeping a close on traders/investors positions. Crude oil this afternoon is trading at 61.59 down over $1 on the day and almost $9 (10%) from the highs before Labor Day. Even though we have had two major hurricanes that have cut domestic supply of energy supplies the price of oil is lower than where it was BEFORE the hurricanes and is on its way to breaking the $60 level as it declines into the low 50’s before the end of the year. Oil is being affected by both a cut in demand (Pres. Bush is pleading with Americans to carpool and cut back on gasoline consumption) and an increase in supply (imports of gasoline and other fuels jumped 26% last week to levels not seen since 1990). Refineries are coming back on line in the South weeks before forecast and full output is expected by mid-November (after the end of the hurricane season). The International Energy Agency is calling it “demand destruction” and is considering ending its emergency fuel releases that have eased shortages caused by the hurricanes. Delta and American airlines are cutting flights as they try and find a way to make $$$ despite the high price of jet fuel…..But the oil price decline has just begun due in part to front page headlines in this morning’s Financial Times “US Energy chief warns prices will stay high”….with these public pronouncements the average driver will continue to believe that high prices are here to stay and this will have the effect of cutting demand car sales (SUV sales are down 51% in the last 12 months) and sooner than later (2006) we will all wonder why everyone got so worried about the high price of oil/gasoline……

Economics 102….a trend stays in motion longer and stronger than anticipated by the majority…real estate qualifies as the biggest and longest bull trend in history and when it finally deflates it will NOT be the crash that everyone predicts but more like the slow “bleeding” that we have seen in the Japanese property market for the past 11 years. We are beginning to see a few cracks in the condo bull market but it will take many more months/years to fully hit in all of the different markets which are advancing at various speeds…In New York we see the offers to sell being reduced at the very high end with one Fifth Avenue apartment being slashed 40% from 2.4M to 1.5MM (it was overpriced to start)., But it’s the increasing supply of new condos that I feel will be the trigger for the impending price decline in this risky area of real estate investing. In Washington D.C. 47,000 new units are scheduled for completion in the next three years at a time when there were 18,872 units for sale in September versus 5,630 a year ago. Most worrisome is that 89% of the apartment sales in Virginia in the past year were for condo conversion projects…..soon there will be competition for renters in these areas….maybe they can entice them with free tickets to Redskins games???? http://www.washingtonpost.com/wp-dyn/content/article/2005/10/05/AR2005100501984_pf.html

Staying with sports…I know many of you are baseball fans (I think the White Sox will go all the way this year) and this morning I read a fascinating article about the branding of the Boston Red Sox in an article from the Wharton School of Business monthly magazine: http://knowledge.wharton.upenn.edu/article/1294.cfm

Back to business…..tomorrow morning we have the usual jobs number but it will be anything like usual as the statistics will be heavily influenced by the two hurricanes and as a result should be reviewed with a heavy dose of skepticism that they are useful in showing the current health of the US economy. Luckily after watching the economy on a daily basis for over 35 years most of my memory is still in tact so I remind everyone that in August 1992 the jobs number was severely affected by Hurricane Andrew, January 1996 the blizzard in the Northeast and then February 1996 the bounce back from the blizzard as everyone went back to work. In each case the estimated number was more than 100,000 off when actually released by the Labor Department. Whatever happens at 5:30am tomorrow I would NOT give it much predictive value for future Fed policy or long term interest rates.

With higher short term US interest rates the dollar has made new highs for 2005 against the Euro and Japanese Yen as the dollar has found buyers from the middle east as much of the new found oil profits ($$Billions) has made its way back into US Treasury securities. But I did notice last week that Venezuelan President Hugo Chavez (he is NOT a fan of President Bush) said that he ordered his finance minister Zavala to transfer $14.4 Billion in US Treasuries into other currencies and Euro bonds. This is a small amount of US bonds and didn’t affect the market but it does show that those who oppose us politically at least have the right idea on how to hurt us economically……..

How long is the Las Vegas strip??? Not sure…but it is growing as Clark County Commissioners approved a new 100 acre site that will extend the strip farther south….the supply of new developments is growing and growing but how can demand increase except by speculators that are betting on even more demand from new investors???? http://reviewjournal.printthis.clickability.com/pt/cpt?action=cpt&title=reviewjournal.com+–+Business+-+Expansion+of+Strip+heading+far+south&expire=&urlID=15795715&fb=Y&url=http://www.reviewjournal.com/lvrj_home/2005/Oct-06-Thu-2005/business/3707958.html&partnerID=569

Japan’s central bank is looking for ways to insure inflation (just a little) comes back permanently to Japan. The rising price of oil and declining value of the yen isn’t helping an economy that has struggled for over 10 years BUT Japanese banks have used the last decade to become stronger and healthier. Mizuho which is the country’s 2nd biggest bank is repaying $2.2 Billion (Mitisubishi $3 Billion) of money borrowed to deal with non-performing loans from the late 1990’s.

Finally, it appears that President Bush is aware of his need to quickly find a replacement for Mr. Greenspan before 1/31/06. In his news conference on Tuesday he actually addressed the issue for the first time in 2005 with the following quote:”The nominee will be someone that can do the job and secondly, will be independent..It’s important that whomever I pick is viewed as an independent person from politics. It’s the independence of the Fed that gives people, not only here in America, but the world, confidence.” I still Believe that former Fed governor Ben Bernanke will be his choice but until it actually occurs the interest rate markets will not be happy with the uncertainty and that is one of the reasons that long term interest rates have gone higher in the last 60 days. It’s times like this that mortgage professionals need perspective…..once we get to 2006 we will be fine and long term interest rates will be lower but when your world consists of day to day interest rate fluctuations even the tiniest movements become larger than life. After living through the late 70’s and early 80’s this is easy to see but sometimes hard to explain……

October 3, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 275 basis points from 1.00% to its current 3.75%. The US Treasury 30 yr. interest rate is DOWN 97 basis points from 5.59% to its current 4.62%.

The clock has is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 120 days before a new Fed Chairman takes office unless of course President Bush forgets or delays the appointment….

120 days is plenty of time for Mr. Greenspan to finish the work that he feels must be done so that the next Fed Chairman can begin his term with a honeymoon and not the nightmare that Mr. Greenspan inherited from Paul Volker in 1987. Due to massive dollar weakness Mr. Greenspan raised short term interest rates in the summer/fall of 1987 only to find a stock market crash laying in wait for the Fed Chairman. In these last few months Mr. Greenspan has his eye directly on the enemy and that is the “real estate” bubble that he believes is the only thing that stands in the way of his legacy as the “greatest” central banker in history. This mornings edition of the Hindu (India) has an interesting article on Mr. Greenspan’s history at the Fed. http://www.hinduonnet.com/thehindu/thscrip/print.pl?file=2005100300231600.htm&date=2005/10/03/&prd=th & There are three FOMC meetings before his retirement and I have written throughout 2005 that the Fed would raise short term rates at EVERY Fed meeting and that the yield curve would invert with short term rates going ABOVE long term rates and staying there until his retirement date of February 1, 2006. Nothing that has occurred over the past month has changed my opinion and even though the FEAR of inflation has entered the marketplace due to high energy prices this is an easy target for the Fed. Very rarely in economic history do we have the enemy overtake a central bank when it is focused on the target in question. Energy prices have risen but it is only a matter of a few more weeks before oil takes out $60 and heads for the low $50’s. While everyone is focused on the supply of energy I am watching the demand side of the equation where even the President is urging drivers to cut back and conserve fuel. Sunday’s Los Angeles Daily News had a front page article that was about how the driving habits of Southern California gas guzzlers is changing and fast..http://www2.dailynews.com/search/ci_3079528. GM & Ford reported a drop in sales for September due to a drastic change in auto buying from SUV’s to more fuel efficient cars but the big US auto makers didn’t see the change coming so they had too few of the smaller cars in inventory.

For my many real estate finance professionals the next 120 days are going to be somewhat uncomfortable as the interest rate market will have more than the usual easy to read economic statistics to digest…This Friday is the usual jobs number but because of hurricanes Katrina & Rita it is doubtful that any number (a loss of 169,000) will be of much use to the number crunchers because no one knows what is really going on in the South. Some businesses that are shut down have kept employees on the payroll and some have hired more in an effort to rebuild so it will be months before we can really judge how the economy is operating and then there is still the fear of new hurricanes as the season doesn’t end for a few more weeks. Oil continues to trade around $65 as the spot market sees buying due to “force majeure” problems at delivery points in the Gulf. Force Majeure is invoked when unexpected catastrophic events make it impossible to make delivery on contracts entered into at a prior date. (eg. oil delivery) How can the price of oil go higher if demand is decreasing??? Last week American Airlines announced that it was cancelling 15 round trips between Chicago and Dallas due to the high price of jet fuel. They have finally figured out that the way to make money/profits is cut back on services that lose $$$ and every flight loses $$$……

There was an interesting interview of the CEO of Toll Bros. (real estate builder) in Today’s USA Today newspaper. As to be expected (how could he not be??) he was extremely optimistic about home prices stating that there is no better time than now to buy a home because the price will be higher tomorrow and that the “froth” in the market has gone away….For a more objective reading you might want to look at a chart of the stock which has fallen over 25% in the last 60 days. I read over 25 newspapers a day not such much to learn what is going to happen in the future but more importantly to find out how people are positioned in the present. http://www.usatoday.com/money/companies/management/2005-10-02-toll-bros_x.htm

Last week it was announced that for the third consecutive month consumer expenditures exceeded income so the savings rate fell to -0.7%. If real estate prices don’t continue to move higher where are the homeowners/consumers going to find the money to keep spending on gasoline, etc.??? Guess what…they are not and the price of oil will fall like a rock when and not if that happens…..Something strange and different may be happening in the real estate finance world….Last Friday’s Fed (h8) report revealed that real estate loans FELL $2 Billion last week and more importantly are only up $2.5 Billion for the last 4 weeks (data is reported on a one week lag) so if this Friday’s report doesn’t show a bounce back we could have a flat or slightly down month (September) for the first time in many years. Has the Hurricane effected this??? Maybe but the home equity category has also shown a dramatic slowdown and is up only $300 Million for the last four weeks and was showing $5-10 Billion monthly gains for most of 2004 & 2005. The Fed is well aware that higher short term interest rates usually have the effect of CUTTING loan demand and that is exactly what is happening in the commercial finance and home equity area…only time will tell if this spills over into the long term mortgage arena. Staying in the home mortgage area ….last year I wrote extensively about FNMA and the BIG problems that were so complicated that few could understand them BUT somehow they would eventually force the change of the entire structure of FNMA and that unfortunately is coming and sooner than later……I always preach that bad news is something a CEO should get out fast and not leave anything behind…..somehow FNMA has continued to tell us of its transgressions on a slow but steady trail that will leave Congress no choice but to severly limit FNMA’s ability to buy mortgages and thus help to widen mortgage spreads over US Treasuries. Again just looking at its stock price we have seen a 25% decline in just the last 60 days…..I wouldn’t be surprised to see FNMA & Freddie Mac combined in some way under a new name so that everyone is not reminded of this catastrophe…..(sort of like a rock band that keeps changing its name until it hits with a hot album)

Last item (I am running to go to Temple for Rosh Hashanah services)….The one item the market is NOT focused on yet is who will be the next Fed Chairman and more importantly what will be his policies. The bond market has not been kind to incoming Fed Chairman and even Mr. Volker and Mr. Greenspan were greeted with major rises in long term interest rates early in their terms. This will cause much volatility over the next few months and real estate professionals need to be on their toes as timing will be CRUCIAL with locks of your long term loans. The good news is that this does NOT change my forecast of much lower long term rates later in 2006 as the Fed will begin a new round of easing (short term rates lower) and that anticipation will cause a new low in long term interest rates and an EXCELLENT opportunity to lock in 30 yr. mortgage rates in the 4%+ region….