December 8, 2008

I have a degree from Wharton in a field call Investment Management Analysis. It is a bit like statistics and probability, but the important part of it is knowing and understanding cycles.
What we went through in October was a complete breakdown in trust. Fear and panic ruled the day and anything other than US government securities was RISKY!!! What occurred was that mortgage backed securities were sold along with all corporate debt and foreign debt. Foreign money sold all their debt and all piled in the US Treasury market. In one day in October the US Treasury issued some $40 Billion in Treasury Bills for 0%, that's right no return. People wanted no risk and would take 0% return for it. Once the T-Bill market went to almost 0, the rest of the Treasury market went the same way. Last week I think we hit the top in price and bottom in yields for Treasuries. The 10 year was at 2.5% and the 30 year at 3.1%. The inflation rate in October was 3.7%. That meant that a negative return was created for investors. Whereas, the Treasury Inflation protected bonds yield over 4%.
Real Estate is a function of money. The great move we had in real estate was from the securitization of mortgage debt. Pensions bought it, foundations bought it, foreign investors bought it and speculators leveraged it and created investment plays over the fractions of a percentage point moves called basis points. They fled the market and mortgages dried up. Only Portfolio Loans from Banks were available at their terms!
T-Bills are 90 day duration. In January the first wave of 0% bills mature. Where do they go? If you look at the corporate bond market you will see that there was a 5% rally in that market this month. As the fear and panic of risk subsides, mortgage backed securities will take hold. This is especially good for the market because the leaders in it were Freddie Mac and Fannie Mae, both now US Government entities. The bonds will be US guaranteed. The yields on those bonds were 7%. That will make the investor holding a 30 year to think, "Why do I want a 3% government bond when I can have a 7% bond. You don't need a masters from Wharton to figure that out. The way back to the credit markets will occur from January forward as the T-Bills mature and the bond yields of Treasuries will go back to an inflation plus relationship.
What does that mean for real estate in the Peninsula and the stronger markets are looking at? Sellers have taken their homes off the market. It is only the estate sales, divorces and fixer uppers that remain; as well as, a few spec builders who want to end their pain. I would look very carefully at what is out their now before the end of the year. If you don't mind paying up and having the comfort of knowing the economy is not going to zero that is your option, wait until next year. My goal is to keep you informed so you can make the wise and comfortable decision.
Happy Holidays,