November 28, 2005

The clock is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 64 days before the new Fed Chairman Ben Bernanke takes office and ends the current Fed tightening cycle.

Since June 30, 2004 the Fed Funds Rate (short term) is UP 300 basis points from 1.00% to its current 4.00%. The US Treasury 30 yr. interest rate is DOWN 97 basis points from 5.59% to its current 4.62%.

I spend most of each morning watching CNBC and Bloomberg TV and when I am not in the office I tape the interviews for later analysis….because it is important for me to know where the “experts” are leaning in their opinions of future interest rate movements. Most of the time the chatter is not very interesting but once in a while I sense a “consensus” of opinion that I believe the majority is following with their investment dollars. Its much like sports teams who study the films from last weeks games in an effort to see repetitive patterns by this weeks opponent. Today I watched as economists, analysts and anyone else in front of a microphone told the audience how it was obvious that interest rates would rise in 2006 the only question was…”how much”??….my question is why do they have to rise at all???? The Federal Reserve has raised the Fed Funds rate for 17 months and yet long term rates have NOT risen as was expected by these so called “experts” all throughout 2005….So guess what happens when short term rates start to decline in 2006??? (after Greenspan) how about a dramatic DECLINE to new lows allowing mortgage borrowers to refinance at historic low 30 yr. rates and giving the real estate boom one last big push to new highs……

The only way for long term rates to rise is for the evil “inflation genie” to return and he is no where in sight….Yes turkey prices are up 17 percent in the last two years but is it inflationary that Macy’s gave away $1million in gift cards on the day after Thanksgiving, Wal-Mart offered to match its competitors prices and most stores saw lots of customers but found overall sales flat at best….when you lower prices you must have more sales just to stay even…..according to the Conference Board consumers plan on spending $10 LESS this Christmas season…..it’s higher oil prices, medical expenses and credit card payments that have cut into the average consumer who doesn’t have that home equity line (ATM machine) or savings (-1.1%) to draw on for those extra purchases….

A reminder that on Friday we have the monthly jobs report and with expectations of a BIG increase of 250,000++ the bond market might just be set up for a surprise to the downside sending bond prices higher and long term interest rates lower…Mortgage professionals might want to wait until after the news at 5:30am before setting your locks….Friday becomes bigger than usual because Mr. Greenspan is giving TWO speeches with the first at 6am (by video) to a Fed Conference in Philadelphia and then at 11am in London at an International Conference. I’m sure he will have something that will move the markets…..

Oil prices continue to fall (57.01) but we finally have some good news on the horizon as the first refinery project in over 20 years has been approved in Arizona. There are now only 150 refineries in the US which is down from 325 in 1980 and we need more because we consume 20 million barrels a day but process only 17 million barrels. It won’t happen overnight but it is a start.. http://www.azcentral.com/business/articles/1123pipeline23.html The biggest casualty from high oil prices is the airline industry where 163 airlines have ended in bankruptcy in the last 25 years.

Has anyone noticed that gold is trading just under $500 and yet the dollar is strong….normally gold rising would be seen as inflationary but I wonder if there are other factors at work….India represents 25% of world gold jewelry demand and with the Middle East NOT recycling their petro dollars back into US treasury securities it appears that their new found wealth is being invested in gold, real estate and the stock market within their own boundaries…..what a change from 30 years ago when the $$$ that flowed out through higher oil prices came right back through bond purchases….Saudia Arabia is using much of its oil proceeds to pay down public sector debt that equals over 90% of GDP…if the Saudi’s thought they could find a better investment they wouldn’t be paying down their own debt….It is NOT inflationary when a borrower reduces debt…when you bet on inflation you borrow, borrow and borrow more hoping to pay back in cheaper dollars devalued by future inflation and that is NOT happening in today’s economy…

Japan continues to pray for what it can’t find….inflation…..The Bank of Japan is predicting inflation of 0.1% in 2006 but it has been telling us the same thing for years…..

Not sure where it fits but found an interesting article in today’s Washington Post about banks competing for commercial customers…PNC and Commerce Bank are doing more than giving away free toasters to prospective clients and its another example of price cutting…http://www.washingtonpost.com/wp-dyn/content/article/2005/11/27/AR2005112700770.html

According to the Census bureau the median size of a new single family home is now 2,140 square feet up from 1,535 feet in 1975…in the last 12 months condo sales are up 14% while single family homes are up only 6.9%…when the bubble bursts and it will (not until everyone is tired of waiting) the condo market will be decimated…….

The high end of the housing market in Chicago seems to be showing buyer fatigue but remember it is the winter so what else could one expect….but for those who want to read the story about an increase in inventory and declining prices…..
http://chicagobusiness.com/cgi-bin/mag/article.pl?article_id=24854&bt=chill+hits+housing&arc=n&searchType=all

November 21, 2005

The clock is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 71 days before the new Fed Chairman Ben Bernanke takes office and ends the current Fed tightening cycle.

Since June 30, 2004 the Fed Funds Rate (short term) is UP 300 basis points from 1.00% to its current 4.00%. The US Treasury 30 yr. interest rate is DOWN 93 basis points from 5.59% to its current 4.66%.

Let’s start the evening with a survey of 45 economists from the National Association for Business Economics (NABE). Somehow these geniuses who have a batting average of less than .200 (not enough to play in the minor leagues) are predicting that 2006 will see a pick up in inflation and the Consumer Price Index (not including food and energy). Much like a football coach posting pre-game quotes from the opposing team to motivate his players this will be bulletin board material for both the exiting Fed Chairman (Greenspan) and the entering chairman (Bernanke). Nothing fires up the Fed like good old fashioned inflation forecasts from the economists/experts who somehow see hurricanes on the way well after the ocean water temperatures have turned cold making it less than likely that a storm is on the way……for the story visit: http://quote.bloomberg.com/apps/news?pid=10000103&sid=a6RnVGgnuxfw&refer=news_index

The recent dollar strength has Europe worried about its own currency. On Friday ECB President Jean-Claude Trichet announced that they were about (December) to raise their short term rate 25 basis points to 2.25% in an effort to defend the Euro (1.18 to the dollar down from 1.35 earlier in 2005). In this mornings Financial Times of London there was a headline “ECB planning several interest rate increases” that sent the euro soaring but Mr. Trichet quickly denied that the ECB was planning anything more than one interest rate increase for the near future (2006). The significance of this is important because many past recessions have been caused by central banks raising short term rates in an effort to defend their currencies. One only has to go back to 1987 when Mr. Greenspan first came into office as Fed Chairman replacing the legendary Fed quarterback named Paul Volcker. His first move was to defend a falling dollar by raising the Fed Funds rate which of course then help cause the famous stock market crash in October. Hopefully the world’s central bankers have learned from history and will NOT decide to use interest rates as a weapon of destruction for their capital markets. The dollar will remain strong as long as US short term rates stay above its trading partners rates and that should be well into 2006.

If you don’t like the way inflation is calculated in the US you might like the new and improved rate in Japan. The Bank of Japan has decided that it really wants to keep short term interest rates at 0.00000001% but with a CPI forecast of 0.5% for 2006 it was under tremendous pressure to raise the rate to 0.00000002%. In an effort to garner support from those that follow the BOJ (is there anyone out there that really cares besides me???) they have decided that they are changing the way the CPI is calculated by including the prices of fresh foods which have continued to fall in 2005. The new method of calculation will reduce the CPI in 2006 from 0.5% to a revised rate of only 0.1% which gives the BOJ plenty of support for existing monetary policy. (how can it be monetary policy when it keeps rates at 0%?)

Not sure where this fits but for stock market fans….did you know that the average gain per trading day (since 1950) for the S&P 500 is 0.034% BUT the average gain for the day before Thanksgiving and the day after Thanksgiving is 0.375% which is over 10 times as big….we will soon see if history repeats itself on Wednesday and Friday……

GM announced that it will layoff another 30,000 workers in an attempt to shrink its work force while somehow holding on to a market share that has shrunk to 26% from 33% in less than 10 years. It’s sounds to me more like an attempt to stave off a bankruptcy that some of Wall Streets sharpest traders are betting on with both hands….

From the real estate file…….In California almost 2% of adults now hold a license to sell real estate with more than 135,000 having taken the state licensing exam so far in 2005. More importantly is the fact that while the number of RE agents has increased by over 25% in the last year the number of properties actually changing hands (sales) has increased only 2%. This is a classic case of a BULL market that has run its course and thousands of RE agents will soon be looking for another line of work as they learn that to increase market share you need to be more efficient than your competition or somehow have many relatives that need to sell properties.

I continue to believe the one area that is ripe for a “crash” are condos where somehow the motto is: “If we build them, they will buy them”….in San Francisco construction will begin this week on a 709 unit luxury complex that will cost $270 million. The completion date is due for December of 2007 at which time I wonder how many people will actually move in versus trying to sell as the market begins to crumble…….It’s a been quite a run for those in the construction business as over the last four years almost 35% of the 2.3 million jobs created in the US have been related to the housing sector. Just remember when the fire begins the exit doors are the same size as they were when you entered and not everyone will survive what is sure to be a bloody massacre for many condo buyers……Last Friday the House of Representatives passed a spending bill that would allow real estate developers/speculators to buy large tracts of federal land that have been previously used for mining ventures…..Just what a bull market needs….more supply at the top….isn’t it amazing that as prices rise we always see more supply (oil) just as the buyers dig deeper into their pockets as the chance of further price gains decreases…..

I’ve saved the best for last…..the argument every real estate buyer uses for increasing prices is that we have a limited supply of land and an increasing number of home buyers. To those who believe this I offer the following facts: Over the past 50 years household formations in the US have averaged an increase of 1.5 million per year with the key 25-44 year category falling in the last year and is at its lowest level (42 million) since 1995. New construction is increasing at a 2 million pace for the past 12 months so supply of new homes is increasing at the fastest level in many years and new household formations is growing at its slowest rate in the last 10 years. Unless we are expecting a massive immigration into the US in the next few months we are going to have hundreds of thousands of homes without residents and prices that are sure to decline when reality sinks in…the hottest business in 2006 is sure to be those who are selling “for sale” signs………

November 16, 2005

The clock is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 77 days before the new Fed Chairman Ben Bernanke takes office and ends the current Fed tightening cycle.

Since June 30, 2004 the Fed Funds Rate (short term) is UP 300 basis points from 1.00% to its current 4.00%. The US Treasury 30 yr. interest rate is DOWN 84 basis points from 5.59% to its current 4.75%.

This morning the world got its first opportunity to hear Mr. Bernanke’s views (Senate Banking committee hearing) about his upcoming chairmanship of the Fed and he didn’t disappoint with a performance that I’m sure pleased Mr. Greenspan. Mr. Bernanke said nothing about monetary policy, nothing about interest rates and the testimony was more like a coronation than a typical Senate (political) televised event. http://www.federalreserve.gov/boarddocs/testimony/2005/20051115/default.htm I seriously doubt we will hear anything substantial from Mr. Bernanke until well after he takes office on February 1, 2006. He will be very careful to avoid getting in the way of current Fed policy where current Fed Chairman Greenspan has two moves remaining in a chess game that defeated the “inflation enemy” many years ago…..December 13th and January 31st will represent the last two increases in the Fed Funds rate and leave Mr. Bernanke’s first move as Fed Chairman an EASE in the spring/summer of 2006 setting up the opportunity of the decade to lock in low interest loans for home mortgages (sub 5%) and other business loans. With the press analyzing every word of past speeches by Mr. Bernanke they fail to realize that this is a job where the past is NOT a good indication of future behavior. Just looking at the past history (Burns, Miller, Volcker, Greenspan) shows that each chairman’s initial policy actions were a function of economic events and required agile and flexible policy decisions that could NOT have been predicted by a review of their past business careers. But for those that want to know more about the next Fed Chairman there was a thorough article in this morning’s Washington Post that detailed his love of baseball statistics and the Red Sox…http://www.washingtonpost.com/wp-dyn/content/article/2005/11/14/AR2005111401544.html

Did you know that a one inch parcel of land is being “listed” for $1500 in Indiana?? It’s part of a foreclosure sale and you can read all about it at: http://www2.indystar.com/articles/7/241528-2177-127.html

From London comes the story of a massive short squeeze in the price of copper ($1.93 per pound) started by a Chinese trader (now in hiding) that somehow sold almost 200,000 tons of copper that he didn’t own…(ouch) at much lower prices. This reminds me of the 1997 short squeeze in zinc that was also caused by a Chinese trader that cost over $700 million in losses for China’s State reserve Bureau. Less than 12 months ago China Aviation lost over $500 million when one of its traders bet on lower oil prices and you know the rest of the story…China is definitely having growing pains as it becomes a world economic leader… http://business.timesonline.co.uk/article/0,,13132-1872416,00.html

Something interesting may be going on with loan demand…In the Fed’s latest H8 release both the commercial and industrial category and the real estate (including heloc’s) sector are showing almost no growth in the last 4 weeks. IF and its a BIG if this continues it could signify the end of a long term trend in rising loan demand. This would give the Fed even more ammunition to end its tightening AFTER Mr. Greenspan retires on 1-31-06. This report is released each Friday at 1:15pm….http://www.federalreserve.gov/releases/h8/ Take a look at page 13 of the latest report and you will see that someone has an unrealized LOSS of $11.3 Billion in what has to be a HUGE long position in US Treasury bonds..The Fed is aware of this and it can only be reversed with a drop in long term rates.

With auto sales weak (down 26% in October) after the surge in summer demand due to reduced prices (employee prices) GM has announced that they are going back to the well to see if they can find more car buyers. They have begun a “red tag” sale where autos are being offered at “supplier” prices which are just above the invoice price paid by the dealers. Sorry….this just isn’t going to work and is one of the reasons that many Wall St. traders are now placing big bets that GM will file for bankruptcy in 2006.

I almost made it through this e-mail without talking about the real estate market but couldn’t resist telling you about the study released by the National Association of Realtors that analyzed 130 separate markets in the US and found that not one was in a “bubble” and would suffer any price decreases in 2006. (surprise, surprise, surprise). I let you do the reading but remember the source….the Las Vegas report: http://www.realtor.org/Research.nsf/files/Las%20Vegas.pdf/$FILE/Las%20Vegas.pdf
and the Los Angeles report: http://www.realtor.org/Research.nsf/files/Los%20Angeles.pdf/$FILE/Los%20Angeles.pdf

Wednesday’s Wall St. Journal has an interesting article about “low doc” home loans with the best quote coming from Barbara Grunkemeyer, deputy controller of the currency (we will be hearing alot more from her over the next few months) who said “How hard is it to come up with a couple of copies of pay stubs and copies of W-2 tax forms” In other words she is asking why all loans can’t be “full doc” and the answer is that it would cripple the mortgage industry and send tens of thousands of mortgage brokers seeking a new form of employment. The good news is that the comptroller of the currency can’t force the lenders to stop issuing these types of loans but she can strongly influence the underwriting standards that are used by these lenders. http://online.wsj.com/article/SB113210807674198518.html?mod=todays_us_money_and_investing

Finally oil is trading tonight at $56.90 and now down almost 20% which is exactly what I said would happen (see my late August e-mails) when I stated the top would be $70 and then a move by December to the low 50’s…we are almost there and it’s almost midnight (my curfew) so I’ll try and send some more nuggets tomorrow evening….

Mortgage broker and real estate agent alert: We may have begun a new 8 week downward cycle in long term interest rates that should take the 10 yr. US treasury down to the 4.00-4.25% range giving many of you another opportunity to find sub 6% 30 year home mortgages……

November 7, 2005

The clock is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly *85* days before the new Fed Chairman Ben Bernanke takes office _and ends the current Fed tightening cycle_.

Since June 30, 2004 the Fed Funds Rate (short term) is *UP* 300 basis points from 1.00% to its current 4.00%. The US Treasury 30 yr. interest rate is *DOWN* 77 basis points from 5.59% to its current 4.82%.

Let’s start with some good news for borrowers…There will only be two more increases in the Fed Funds rate and they will occur on December 13th and January 31st (the last day of Mr. Greenspan’s term as Fed Chairman). This will put the Fed Funds rate at 4.50% and the Prime Rate at 7.50% and will mark the END of the rise in short term interest rates for the cycle that began 16 months ago. I have written many times but it must be repeated that since 1958 fed funds rate increases have averaged 19 months which again puts us at an end point of January 31, 2006. Mr. Bernanke will have two months before he has to make his first BIG decision about Fed policy as the next FOMC meeting doesn’t take place until March 28, 2006. Yes, Mr. Greenspan has set the table for Mr. Bernanke and his first meal as Fed Chairman will be easily digestible and set him on course for a Fed easing in the summer of 2006. For those that want to hear Mr. Bernanke’s current views of interest rates his Senate confirmation hearings will take place on Tuesday November 15th.

The Fed’s October loan officer survey of 76 mostly large banks was released this morning and the most interesting nugget came from question 12 which asked if banks had “tightened” their underwriting standards on Heloc (home equity line of credit) since the bank regulators stongly worded release on May, 16, 2005. Almost every bank’s answer was “NO” and that tells me that the bank regulators will come up with even tougher guidelines for Heloc’s when the Comptroller of the Currency sends its examiners out for field reviews in the next couple of months. I’m sure Mr. Greenspan (and Mr. Bernanke) are not happy that banks haven’t received the message that the Fed wants to stop the flow of easy credit to addicted home owners who treat their home equity like an ATM machine. http://www.federalreserve.gov/BoardDocs/SnLoanSurvey/200510/

From Sunday’s London Times comes a story that could have easily been found in a US newspaper. It seems that every “expert” in England had predicted a crash in the housing market in 2005 and instead we saw a small pull back in prices and now another advance seems to be beginning with a 1.3% increase in October. With so much money on the sidelines waiting to come in and buy it will be hard for a crash to start in the US so after a pull back over the next few months I expect the final leg of the “bull market” in house prices to begin in the summer of 2006 just as the Fed begins to ease again and of course that will make everyone believe that Mr. Bernanke is the greatest Fed Chairman since ??? Greenspan, Volcker, etc…. England has been about a year ahead of the US …. http://business.timesonline.co.uk/printFriendly/0,,2020-528-1859131-17849,00.html

An interesting article today for Real Estate agents about a new online venture called “Zillow” which comes from a couple of the Expedia founders. They see big $$$ if (and its a BIG if) they are able to take out the middleman (RE agent) in the process of buying or selling a home. For more info visit: http://www.zillow.com

Most of the BIG price increases in real estate have come from homes but from Seattle, Washington we see that apartment buildings are selling for levels almost 60% higher than just two years ago and averaging $140,000 a unit. It seems investors have left California and New York and headed for places that appear to be “undervalued” and the Pacific Northwest has caught the “fever”…http://archives.seattletimes.nwsource.com/cgi-bin/texis.cgi/web/vortex/display?slug=apartmentboom03&date=20051103&query=apartment+buildings+sizzle

Last Thursday November 3rd Mr. Greenspan gave his final testimony before the Joint Economic Committee of Congress and although his prepared remarks were rather “dull” (can Mr.Greenspan ever be dull???) his comments in the question and answer session did have a few tidbits….1st he said that the yield curve was NO longer a good leading indicator of economic activity…Excuse me….Mr. Greenspan carries with him every day a study by the NY Fed in 1996 that showed just how far the Fed can go with an inverted yield curve before starting a recession…..I guess he forgot what was in the right pocket of his suit….2nd he did acknowledge that the Fed has been rather “lucky” in its policy moves as he referred to a chart of inflation that he keeps: “we somehow had this chart up there and every time the inflation rate got close to the top, we tightened (raised short rates) and every time it got down to the bottom, we eased (lowered short rates). *And that is NOT the way policy is supposed to be run.*” No kidding Mr. Chairman…it’s the equivalent of taking a stock chart that shows a range of 50-100 and buying everytime the stock is 50 and selling when it reaches 100. This might work a few times but eventually the stock will break through the top or bottom of the range and then what are you supposed to do???? We are talking about a world watching these moves not just a stock speculator……..If the markets knew about this when they happened they would have yelled for Mr. Greenspan’s immediate resignation…BUT in the end it all worked out….as usual no one complains and he is retiring so this will only be a small footnote in the history books…..

Did you know that according to the National Association fo Home Buyers condos account for *35% *of all new home construction in the US this year???

According to Freddie Mac homeowners took “cash out” of their residences over $60 Billion in the third quarter of 2005…..most will be used for higher gasoline and heating bills this winter…..

Last Friday’s jobs report showed a 56,000 increase but the most amazing statistic is that only 50.2% of the companies surveyed are showing growth in their payrolls and that 49.8% are not hiring or laying off workers….This is anything but a strong economy and NOT the environment for higher inflation.

With higher prices (oil) comes a slowing in demand and according to the recently released Personal Consumption Expenditures Index (Mr. Greenspan’s favorite indicator) demand for energy products has fallen 3% over the past 12 months. Oil is trading tonight at $59.50 and headed to low 50’s by the end of the year.

Finally an incredible quote from a publication that charges thousands of dollars (my e-mails are still FREE, but you never know) to money managers and others…”FRB Chairman Greenspan obviously is leaving the heavy lifting of monetary policy to his replacement nominee Ben Bernanke.” This just proves that high subscription prices don’t equate to the quality of work product…I wonder if this publication will remember what it said in 2006 when Mr. Bernanke does NOT raise short rates and then lowers them in the summer of 2006. This quote is going on my bulletin board and will stay there until Mr. Bernanke makes his first move…..we’ll see who is right…….

I have a feeling 2006 is going to be a great year and one of my favorite sayings is: ” when you have a hunch, it’s time to bet a bunch”…….more about 2006 in a few weeks…for now real estate professionals might want to hibernate until Mr. Greenspan leaves office on 1-31-06.

November 2, 2005

The clock is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 90 days before the new Fed Chairman Ben Bernanke takes office and ends the current Fed tightening cycle.

Since June 30, 2004 the Fed Funds Rate (short term) is UP 300 basis points from 1.00% to its current 4.00%. The US Treasury 30 yr. interest rate is DOWN 79 basis points from 5.59% to its current 4.80%.

12 down and only 2 to go and we are DONE for this Fed cycle. What began on June 30, 2004 will come to an end on January 31, 2006 as the Fed has just two more hikes in the Fed Funds rate. Magically as aggressive as the Fed has been for the past 19 months it will all change when the new Fed Chairman takes office on February 1, 2006. Since 1958 the average number of months for a Fed tightening cycle has been 19 months and January 31, 2006 will make exactly 19 months from the first Fed funds hike on June 30, 2004. The recent rise in long term US treasury rates is close to the end as the bond market has created inflation fears from economic statistics that show an economy and real estate slowing down (not crashing) as the recent Fed Funds hike have started to create some hesitation in consumer spending patterns. The other fear of course is the unknown future of Fed policy led by Mr. Bernanke. I have read in quite a few publications that all Fed Chairman raise short term rates early in their term to show the interest rate market that they have what it takes to keep inflation at a manageable level. As many of you know I do believe that history does repeat itself but NOT when we expect….and this is going to be another example where the majority is looking for something that just isn’t going to happen.

Yes the last five Fed Chairmen did raise the Fed Funds rate in the first three months of their term (Martin 1951 +20 basis points, Burns 1970 + 100 bp, Miller 1978 + 100 bp, Volcker 1979 + 100 bp, Greenspan 1987 + 100 bp) but just like June 2004 these economic times are very different. In June 2004 when the world knew that the Fed would begin to raise the Fed Funds rate from 1.00% the overwhelming consensus was that long term rates would also rise, I wrote that the normal cycle was broken and that long term rates would fall as short rates rose…..now we have the same situation…the consensus is that Mr. Bernanke will continue what Mr. Greenspan has started…..but this is at best a 1000/1 shot. A few weeks ago when I was teaching a class on interest rates someone asked the best question of 2005: “If Mr. Greenspan was NOT retiring in January 2006 would he still be increasing short term rates at every FOMC meeting??? I hesitated for a minute and then answered “No” and that really is the key to the interest rate puzzle for the remainder of 2005 and 2006. The normal reason for the Fed to tighten is heavy demand for products and services that are causing rising prices over a BROAD sector of the economy. Yes energy prices rose this summer but as I have written for the past 6 months this has only caused a reallocation of consumer spending patterns that have cut back on other areas to make up for the extra $$$ going to gasoline, heating oil, etc. Mr. Greenspan (testifies Thursday morning to the Congressional Joint Economic Committee at 7am) is well aware of current inflation (under 2%) but he has run out of time and does NOT want history to repeat itself for the next Fed Chairman. The part of history that no one except Mr. Greenspan remembers is that right after the past five Fed Chairmen raised short term rates we had a recession or stock market crash shortly after the rise in the fed funds rate and that is something that Mr. Greenspan wants to prevent form occurring in 2006. It has been a tough 17 months for those that have adjustable rate mortgages but a little more patience and the yield curve will be back to its normal positive slope with short rates lower than long rates. This period is also giving the real estate sector a much needed rest and with so much money on the sidelines waiting for a pullback a Fed easing in the summer of 2006 will create another (and probably last) leg up in this bull market for residential real estate. The two countries (New Zealand and England) that led the US property boom have now completed their pullback and are showing rising prices again even though consumer retail demand remains weak….It takes a lot to take down a long bull market and the US may prove to be no exception. Now before you start to wonder if I have changed my opinion of the US market….I continue to forecast a MAJOR top in property prices (especially condos) but tops take time and the decline will NOT be a quick crash but more of a slow bleed as property prices decline approx. 5% a year for 8-10 years. It’s way too late to buy anything but I’m not sure we have seen the high prices for this cycle but I would still be a seller into strength over the next 6-9 months. Real Estate is not like the stock market where it is easy to see trends reverse and have stop losses ready…real estate is illiquid and sometimes it is better to exit the party early and leave a little bit on the table for those that still believe that this bull market will never end……

If the economy was really strong and inflation running wild…would we see Wal-Mart begin to lower prices in early November ahead of the BIG holiday season??? http://money.cnn.com/2005/11/01/news/fortune500/walmart_blackfriday/index.htm

If inflation was about to take off would we have wages growing at only a yearly rate of 2.3%???? It appears that the US consumer is realizing that the real estate tree doesn’t grow to the sky as the savings rate in September improved to a -0.4% from -1.1% in August. With short term rates (4%) higher than inflation (2%) we should see an immediate improvement in the balance sheet of American families.

A few random notes: FNMA reduced its mortgage portfolio at a 47% annual rate in September. Is there any doubt why mortgage spreads have widened???? Tokyo land prices have risen in 2005 for the FIRST time in 15 years…..If raw inflation (includes energy and food) is only 4% with energy prices up 35% this year what happens to CPI when oil prices pull back to the low 50’s level in the next few months?? How about 0.0% inflation that gives Mr. Bernanke room to LOWER short rates in 2006….. Centec is offering 5% discounts and other incentives on home purchases in Atlanta……

We have the jobs number on Friday at 5:30am so long rates could be volatile over the next couple of days but we are getting closer and closer to a top in long rates for this cycle.

I need some sleep…..I’ll have more in a couple of days….