February 6, 2009

30 year Treasury Bonds are now at 3.68% and on my last letter to you they were at 3.06%. Mortgage rates were at 4.5% for conforming loans and now they are at 5.56%. This month the Government will raise approximately $36 billion of maturing debt and raise $30 billion of new debt. Gold has rallied from a low in December 2008 of $707.32 to $914 today.

A recent article in the Wall Street Journal, January 30, 2009, quotes George Sorros stating that if the Euro may not survive as a common currency unless the European Union presses for an international agreement on dealing with soured assets. Milton Friedman famously predicted that the euro would not last past their first economic crisis.

What does that mean for us who are looking to purchase or sell real estate? I suggest you look back in time to 1973-74 the last great recession we had. Like today there was world chaos, a recession, unemployment of over 8%, Presidents under pressure and gold as a source of store of value.

In 1977 Real estate values jumped over 40%. In many growth areas values were stronger. European and Asian buyers were considered "flight to safety" buyers as they purchase U. S. Real Estate. Banks were over loaded with REO's found ready buyers with "fright" money.

So is it today. Rates will increase as the U. S. Government raises Trillions of Dollars to stage our economic recovery. There is no chance that the mistakes of Japan in the past will be created today. With the increase in rates you will witness a strong demand as the dollar strengthens and the Euro weakens. Asian investors; as well as, Middle Eastern investors will look to stabilize their portfolios with U.S. $ denominated assets. Will they buy stocks, bonds, or hard assets?

I think the price of Gold will tell where they will go, hard assets. Gold will be the first choice and then hard assets which provide income, real estate.

As commercial mortgages become delinquent, assets behind them will be sold and investors will pounce upon them as they have pounced upon foreclosure sales, REO sales and short sales. If there is any fear in your mind that real estate is shaky, look at the sales of foreclosures.

I suggest you buyers begin to look at what is available today AFTER you obtain a financing commitment. There is not one mortgage broker I have spoken to that does not believe that interest rates on mortgages will be higher one year from now. The math is simple. Take that one percent and multiply it against the 80% you will owe on your mortgage and that is what it will cost you for at least the next 15 years of a 30 year fully amortized loan. If you want to be exact take out the HP and work the numbers and see what 1% means. It will be a substantial sum over another 10% in real estate prices.

From my stand I have been over whelmed with new buyers. All have cash and all have great credit ratings.

To those of you, who are looking to list, wait a few more months. The inventory levels are high, a carry over from December. December is a normal month of historical high inventory. As we reach into March and April inventories are low and buyers who have waited for the decline in price and increase in inventory find themselves stuck into a larger crowd all trying to get through a increasingly smaller doorway.