Wednesday, June 2, 2010
Monday, May 10, 2010
May 6, 2010 European Union
Mayor McKae’s Blog
May 6, 2010
“May you live in interesting times”?
There is supposedly an old Chinese Curse, “may you live in interesting times”. I would say that certainly appears to be the case today. The motherland of democracy, Greece, has protestors against the democratic process in the streets; the Communist Party of Greece has taken over the Parthenon. Greece may be the first Sovereign Nation of Euro land to default on its debt. Portugal, Ireland, Italy, Spain and possibly the UK are looking like they are next to the “chopping block”. Gold has broken $1200 an ounce and forecasters are saying, “$5000 is the target”. Glass Steagal Act is being brought back from the dead as the political parties now bite the hand that has fed them for years, Wall Street (if we get a return to Glass Steagal watch financials drop 25%). To make that all confusing the rate of interest on U.S. Government debt has dropped! All forecasts for rates were that they were to rise. Yours truly was making that forecast too!
OK, what’s going on? First I must admit that it appears we are getting a return back to post Euro. This means that world banks had prior to the Euro; Gold, the U.S. Dollar and their local currencies were used as bank reserves. When the ECB and IMF came about, the reserves of Gold were jettisoned and the Euro Sovereign Debt was replaced along side the reserves in U.S. Government Debt. The mix I hear is 65% US Debt + 25% Euro Sovereign Debt + 10% Other Sovereign Currency Debt) That all sounds wonderful, but if one nation can keep on printing debt without any backing other than the “full faith” of the Euro or the US Dollar, is that a reserve worth?
Let me digress on this subject and take you back to the days of Teddy Roosevelt. Not really TR but his predecessor, McKinley. The US $ back then was 100% backed by gold. When Teddy went up San Juan Hill and the US became a nation to be noticed, Governments of the world were astonished that this pipsqueak country, the United States of America, financed the $50 million Spanish-American war with its own reserves. We were a nation of savers. Today we go hat in hand to those same Barbary Pirates, who the Marines made humble, “on the shores of Tripoli”, and borrow so we can live!
Enough digression, the change you are witnessing is not changing but a return back to the original status quo. The world banks are returning back to the old reserve system. Gold is back as a reserve. You saw it not too long ago when India bought the full IMF offering. You see it today as Gold vaults over $1200. U.S. Treasury bonds have rallied in price and dropped in yield. This is a great opportunity for the FED to unload their inventory of bonds. The FED has already stated that it does not need to unload all the $1 Trillion plus in debt. The FED says only half need to be sold in an orderly fashion and the balance will mature or be redeemed through re-financing. To my pleasure, my forecast for higher rates is now put off.
Europe will go into a recession; if austerity is in vogue in Spain, Italy, Ireland, Greece and Portugal; who is buying and with what? I lost track on the amount Greece gets in loans, but I do know it has an interest rate attached and the payment of the rate of interest will be paid before a pension is paid, a hospital is built, a tank is bought, a building is built and increased taxes will create a burden on businesses. Greece needs to re-invent itself. It needs to create an environment for investment and an industry to attract investments. Listen, I was a successful broker in Hawaii. I loved the view of Waikiki while I worked the market. The Aegean is a beautiful blue body of water. Reinvention, money to help transition, some sacrifice of the socialistic society and return to economic health without the chaos of the Euro being terminated.
That takes Europe out of the world trade equation for a while. What about the rest of the world? Who or what country or countries or geographic area will pick up the slack? China, the Asian Tigers, Latin America, Africa or maybe a new orientation of countries; may be it will be just a singular country. Maybe it will be a country that is known for safety, security and is the most trusted world currency. Could that be the US?
I wrote in the past that this recession and bubble burst is no different that the 1974 recession. Look to the past to predict the future. I will expect the reserves of world banks to return to US$, Gold and Sovereign debt. Frankly, I doubt if I were a Banker I would own Greek Sovereign Debt, rather, I would replace it with German Sovereign Euro debt, US Treasuries and Gold.
Investing in the US will become the new vogue. Hard Currencies will be in vogue and assets on the books will be hard assets first and debt last. Hard Assets like Gold, Real Estate, local business loans and government debt. I can tell you, I would prefer to have a loan from a local business on my books than a foreign government who uses repo’s and other sham transactions to hide its debt.
We will go back to the old fashion way of making money, “Earning it”, “Saving it”, “Investing it” and “making it productive”. China has jumped the game. China has begun to diversify its broad portfolio of trade balances. The Euro’s and US Dollars and other currencies are being circulated into the system as China buys companies and hard assets like Gold.
I don’t think that the Euro will end. It is logistically too difficult to terminate the Euro. There is no mechanism to force a country out of the Euro. The solution may be the most unpalatable of decisions, default. Default will not ruin the Euro. Greece borrowed using the Euro as a crutch and hid their finances with sham transactions. Look here, we had New York City in default in the 70’s and it did not collapse the $US. New York City came out of it, there was something called the Municipal Assistance Corporation to help NYC regain and solve their problems. All it took was money. Generated by debt, guaranteed by the US Government. We bailed out Europe once before, it was called THE MARSHALL PLAN, and IT WORKED! We did it with more debt historically than ever as a result of financing from WWII. We survived and so will Europe and the US!
If you want to see a real crisis in the World try and figure out how to untangle the complex transactions in Euros. I can imagine mountains of debt left with countries unable to service them. The results could be legal wrangling, mass personal bankruptcies and creditor losses. Then there is what to do the European Central Bank? Not an acceptable solution! All it is going to take is MONEY, LOTS OF MONEY!
Let me give you another sickening feeling in your stomach, while money is being thrown as the solution. If you’re upset about the spending to help banks and Wall Street and the new health care bill, or the great bonus to traders; get ready for the IMF bail out of Greece. The US owns 49% of the IMF and will put in some $39 billion. Yes, Mr. and Mrs. American Taxpayer you will now bailout Greece. How do you feel about that? Oh, wait on your timing using Maalox; soon it will be Portugal, Ireland, Italy and Spain. Don’t drink the full bottle all at once. The kid with the Big Ears in Washington needs some too! But wait, you may not need that full bottle. The contagion may end with Greece. If Greece is allowed to default and re-structure and survive, the rest of Europe can sit back and have a sigh of relief. Better yet, if the money allows Greece time to re-invent itself and re-structure, so much the better and the same sigh of relief. The line is in the sand and we must wait out the outcome. I think of a TV series of the 50’s, “Life with Riley”, his favorite saying was, “what a revolting development”.
With all this chaos what is happening here in our real estate market? To tell you the truth, it is GREAT! I have listings, I have buyers, the sellers are now realistic and the buyers know that the days of stealing a property are over. One of our Keller Williams agents has been rumored to have had closed $150 million in real estate transaction so far this year. Yours truly has over $21 million in deal pending. That does not look like a dead real estate market to me.
Keep looking for my tweets and short emails on daily events.
Good Buy!
Gary McKae
May 7, 2010
May 6, 2010
“May you live in interesting times”?
There is supposedly an old Chinese Curse, “may you live in interesting times”. I would say that certainly appears to be the case today. The motherland of democracy, Greece, has protestors against the democratic process in the streets; the Communist Party of Greece has taken over the Parthenon. Greece may be the first Sovereign Nation of Euro land to default on its debt. Portugal, Ireland, Italy, Spain and possibly the UK are looking like they are next to the “chopping block”. Gold has broken $1200 an ounce and forecasters are saying, “$5000 is the target”. Glass Steagal Act is being brought back from the dead as the political parties now bite the hand that has fed them for years, Wall Street (if we get a return to Glass Steagal watch financials drop 25%). To make that all confusing the rate of interest on U.S. Government debt has dropped! All forecasts for rates were that they were to rise. Yours truly was making that forecast too!
OK, what’s going on? First I must admit that it appears we are getting a return back to post Euro. This means that world banks had prior to the Euro; Gold, the U.S. Dollar and their local currencies were used as bank reserves. When the ECB and IMF came about, the reserves of Gold were jettisoned and the Euro Sovereign Debt was replaced along side the reserves in U.S. Government Debt. The mix I hear is 65% US Debt + 25% Euro Sovereign Debt + 10% Other Sovereign Currency Debt) That all sounds wonderful, but if one nation can keep on printing debt without any backing other than the “full faith” of the Euro or the US Dollar, is that a reserve worth?
Let me digress on this subject and take you back to the days of Teddy Roosevelt. Not really TR but his predecessor, McKinley. The US $ back then was 100% backed by gold. When Teddy went up San Juan Hill and the US became a nation to be noticed, Governments of the world were astonished that this pipsqueak country, the United States of America, financed the $50 million Spanish-American war with its own reserves. We were a nation of savers. Today we go hat in hand to those same Barbary Pirates, who the Marines made humble, “on the shores of Tripoli”, and borrow so we can live!
Enough digression, the change you are witnessing is not changing but a return back to the original status quo. The world banks are returning back to the old reserve system. Gold is back as a reserve. You saw it not too long ago when India bought the full IMF offering. You see it today as Gold vaults over $1200. U.S. Treasury bonds have rallied in price and dropped in yield. This is a great opportunity for the FED to unload their inventory of bonds. The FED has already stated that it does not need to unload all the $1 Trillion plus in debt. The FED says only half need to be sold in an orderly fashion and the balance will mature or be redeemed through re-financing. To my pleasure, my forecast for higher rates is now put off.
Europe will go into a recession; if austerity is in vogue in Spain, Italy, Ireland, Greece and Portugal; who is buying and with what? I lost track on the amount Greece gets in loans, but I do know it has an interest rate attached and the payment of the rate of interest will be paid before a pension is paid, a hospital is built, a tank is bought, a building is built and increased taxes will create a burden on businesses. Greece needs to re-invent itself. It needs to create an environment for investment and an industry to attract investments. Listen, I was a successful broker in Hawaii. I loved the view of Waikiki while I worked the market. The Aegean is a beautiful blue body of water. Reinvention, money to help transition, some sacrifice of the socialistic society and return to economic health without the chaos of the Euro being terminated.
That takes Europe out of the world trade equation for a while. What about the rest of the world? Who or what country or countries or geographic area will pick up the slack? China, the Asian Tigers, Latin America, Africa or maybe a new orientation of countries; may be it will be just a singular country. Maybe it will be a country that is known for safety, security and is the most trusted world currency. Could that be the US?
I wrote in the past that this recession and bubble burst is no different that the 1974 recession. Look to the past to predict the future. I will expect the reserves of world banks to return to US$, Gold and Sovereign debt. Frankly, I doubt if I were a Banker I would own Greek Sovereign Debt, rather, I would replace it with German Sovereign Euro debt, US Treasuries and Gold.
Investing in the US will become the new vogue. Hard Currencies will be in vogue and assets on the books will be hard assets first and debt last. Hard Assets like Gold, Real Estate, local business loans and government debt. I can tell you, I would prefer to have a loan from a local business on my books than a foreign government who uses repo’s and other sham transactions to hide its debt.
We will go back to the old fashion way of making money, “Earning it”, “Saving it”, “Investing it” and “making it productive”. China has jumped the game. China has begun to diversify its broad portfolio of trade balances. The Euro’s and US Dollars and other currencies are being circulated into the system as China buys companies and hard assets like Gold.
I don’t think that the Euro will end. It is logistically too difficult to terminate the Euro. There is no mechanism to force a country out of the Euro. The solution may be the most unpalatable of decisions, default. Default will not ruin the Euro. Greece borrowed using the Euro as a crutch and hid their finances with sham transactions. Look here, we had New York City in default in the 70’s and it did not collapse the $US. New York City came out of it, there was something called the Municipal Assistance Corporation to help NYC regain and solve their problems. All it took was money. Generated by debt, guaranteed by the US Government. We bailed out Europe once before, it was called THE MARSHALL PLAN, and IT WORKED! We did it with more debt historically than ever as a result of financing from WWII. We survived and so will Europe and the US!
If you want to see a real crisis in the World try and figure out how to untangle the complex transactions in Euros. I can imagine mountains of debt left with countries unable to service them. The results could be legal wrangling, mass personal bankruptcies and creditor losses. Then there is what to do the European Central Bank? Not an acceptable solution! All it is going to take is MONEY, LOTS OF MONEY!
Let me give you another sickening feeling in your stomach, while money is being thrown as the solution. If you’re upset about the spending to help banks and Wall Street and the new health care bill, or the great bonus to traders; get ready for the IMF bail out of Greece. The US owns 49% of the IMF and will put in some $39 billion. Yes, Mr. and Mrs. American Taxpayer you will now bailout Greece. How do you feel about that? Oh, wait on your timing using Maalox; soon it will be Portugal, Ireland, Italy and Spain. Don’t drink the full bottle all at once. The kid with the Big Ears in Washington needs some too! But wait, you may not need that full bottle. The contagion may end with Greece. If Greece is allowed to default and re-structure and survive, the rest of Europe can sit back and have a sigh of relief. Better yet, if the money allows Greece time to re-invent itself and re-structure, so much the better and the same sigh of relief. The line is in the sand and we must wait out the outcome. I think of a TV series of the 50’s, “Life with Riley”, his favorite saying was, “what a revolting development”.
With all this chaos what is happening here in our real estate market? To tell you the truth, it is GREAT! I have listings, I have buyers, the sellers are now realistic and the buyers know that the days of stealing a property are over. One of our Keller Williams agents has been rumored to have had closed $150 million in real estate transaction so far this year. Yours truly has over $21 million in deal pending. That does not look like a dead real estate market to me.
Keep looking for my tweets and short emails on daily events.
Good Buy!
Gary McKae
May 7, 2010
Tuesday, April 20, 2010
Goldman Sachs Indicted for Fraud
Mayor McKae’s Blog
April 16, 2010
Goldman Sachs Indicted for Fraud
Just when you thought things were getting back to normal. This pops up, or was it the comment a spouse makes to another, “honey maybe we should put another $100,000 in the market”? GOD FORBID!
The next 8-10 years you will see an enactment of the 1974 to 1983 years. 1974 was then the worst recession since the Great Depression. More money was lost out in the stock and bond markets than in the Great Depression. Well it happened again.
I have written this before, but it is highly improbable you will see back-to-back 40% returns on the stock market and a similar bull market in Bonds. From a probability and statistical standpoint the chance of a 40% standard deviation in the stock market is less than 10%, it happened last year. Two years in a row very slim.
Sooner or later investors will find the returns on Money Market funds to low and the stock and bond market too risky. Private investment in Hedge Funds, are you kidding me Mr. Madoff?
Where will they go? I look at the past and I say it is real estate. The real estate market is coming to life; REIT’s are being bought by other REIT’s, median home prices are going up. Foreclosures and short sales are becoming a smaller piece of the home sale market as higher end homes are pushing up median prices. Silicon Valley is hiring and confidence is being restored in Silicon Valley.
Timing was auspicious for the SEC to announce the indictment of Goldman Sachs. The Senate is deadlocked on a finance regulation bill, Obama’s Boys are upset, banks are not lending and pay is outrageously high for Wall Street. Look at the fellow who has lost his job and has stopped looking. He reads that the average pay on Wall Street is at record highs. Are you not surprised the Tea Party is growing across the country?
Let me tell you why I think interest rates will move up. It is called the “Carry Market” among traders. Let’s take a bank-trading department. The bank management must review risk and capital against loan applications. On one hand the bank has their capital invested in Treasury Bonds and Treasury Bills. Let us say this bank has their excess capital in 10-year Treasury Bonds. 10-year Treasury Bonds most mimic mortgages. The Bank has the bonds at par, for example $1,000,000. The coupon is 3.83%, example only as this is the last quoted yield. The Bank does not put up $1,000,000. The Bank is allowed to use leverage. They put up $100,000, actually much less. But I will use this as an example. The banks borrow money from the Federal Reserve System at ¾%.
$100,000 invested
$38,300 annual interest
$6,750 interest expense ($900,000 times .75%)
$31,550 net returns per year
31.6% annual return on invested capital
Alternative is Home Buyer with 20% down 700 credit rating and 4 to 1 ratio of income to mortgage payment including property taxes. The interest rate on a jumbo 30-year mortgage is 5.9% with 1 point.
Do you think there is an incentive for the bank to lend money to the homebuyer when they replace a 31.6% return on capital? Why should they?
Prior to March 31, 2010 the bank had a field day, the FED was buying, 90% of the mortgages ended up in US Government hands. The banks acted as intermediaries and servicing agents and they received double-digit returns on their capital. Why should there be a surprise when banks announce record earnings and trader’s earn record earnings. The traders made it, not the old-line bankers.
Do you understand why the examinations on Capitol Hill are over the bank using the trading desk for their own benefit rather than providing loans to businesses and home buyers. The banks are using taxpayer money to line their pocket with leveraged trades. All they are today are Hedge Funds insured by the US Government. That is why the Finance Index has out performed all other indexes and averages. That I why the Tea Party is getting stronger as they see tax payers are lining the pockets of bank traders at the expense of tax payers.
Now, I am not a Tea Party member, but I do know history. If you go back again in time and read Teddy Roosevelt life story, you will see a similarity of the Robber Baron of the late 19th Century and TR work as a Progressive to change and stop the abuses that were going on at the time.
What stops this? The FED raises short-term rates, the Discount Rate; a rate that does not affect the Average American. It only affects banks and brokers. When this happens bond prices drop as yields move up and the bank losses money on the bonds and their cost of money increases. If the FED raises rates by ¼ of a point or .25% to 1%, what is the effect?
$100,000 invested
$38,300 interest income
$9,000 cost of money
$61,274.51 loss on value of 3.83% bonds in a market where bond yield is now 3.83% - .25% or 4.08%
-$31,974.51 loss on investment.
When that happens the game is over and the banks are now back to where they should be lending money to qualified borrowers and helping the economy grow and employing the fellow who stopped looking for a job.
From Yahoo Finance this is the rate market as it was at 4PM Friday April 16, 2010:
30 Year Fixed
Today: 5.19% Last Week: 5.23%
15 Year Fixed
Today: 4.38% Last Week: 4.48%
1 Year ARM
Today: 3.37% Last Week: 3.89%
30 Year Fixed Jumbo
Today: 5.90% Last Week: 5.95%
5/1 ARM
Today: 3.94% Last Week: 3.97%
3/1 ARM
Today: 4.33% Last Week:4.40%
Study the history books and see why I am saying interest move up and why median home prices will move up.
Gary McKae
April 16, 2010
Goldman Sachs Indicted for Fraud
Just when you thought things were getting back to normal. This pops up, or was it the comment a spouse makes to another, “honey maybe we should put another $100,000 in the market”? GOD FORBID!
The next 8-10 years you will see an enactment of the 1974 to 1983 years. 1974 was then the worst recession since the Great Depression. More money was lost out in the stock and bond markets than in the Great Depression. Well it happened again.
I have written this before, but it is highly improbable you will see back-to-back 40% returns on the stock market and a similar bull market in Bonds. From a probability and statistical standpoint the chance of a 40% standard deviation in the stock market is less than 10%, it happened last year. Two years in a row very slim.
Sooner or later investors will find the returns on Money Market funds to low and the stock and bond market too risky. Private investment in Hedge Funds, are you kidding me Mr. Madoff?
Where will they go? I look at the past and I say it is real estate. The real estate market is coming to life; REIT’s are being bought by other REIT’s, median home prices are going up. Foreclosures and short sales are becoming a smaller piece of the home sale market as higher end homes are pushing up median prices. Silicon Valley is hiring and confidence is being restored in Silicon Valley.
Timing was auspicious for the SEC to announce the indictment of Goldman Sachs. The Senate is deadlocked on a finance regulation bill, Obama’s Boys are upset, banks are not lending and pay is outrageously high for Wall Street. Look at the fellow who has lost his job and has stopped looking. He reads that the average pay on Wall Street is at record highs. Are you not surprised the Tea Party is growing across the country?
Let me tell you why I think interest rates will move up. It is called the “Carry Market” among traders. Let’s take a bank-trading department. The bank management must review risk and capital against loan applications. On one hand the bank has their capital invested in Treasury Bonds and Treasury Bills. Let us say this bank has their excess capital in 10-year Treasury Bonds. 10-year Treasury Bonds most mimic mortgages. The Bank has the bonds at par, for example $1,000,000. The coupon is 3.83%, example only as this is the last quoted yield. The Bank does not put up $1,000,000. The Bank is allowed to use leverage. They put up $100,000, actually much less. But I will use this as an example. The banks borrow money from the Federal Reserve System at ¾%.
$100,000 invested
$38,300 annual interest
$6,750 interest expense ($900,000 times .75%)
$31,550 net returns per year
31.6% annual return on invested capital
Alternative is Home Buyer with 20% down 700 credit rating and 4 to 1 ratio of income to mortgage payment including property taxes. The interest rate on a jumbo 30-year mortgage is 5.9% with 1 point.
Do you think there is an incentive for the bank to lend money to the homebuyer when they replace a 31.6% return on capital? Why should they?
Prior to March 31, 2010 the bank had a field day, the FED was buying, 90% of the mortgages ended up in US Government hands. The banks acted as intermediaries and servicing agents and they received double-digit returns on their capital. Why should there be a surprise when banks announce record earnings and trader’s earn record earnings. The traders made it, not the old-line bankers.
Do you understand why the examinations on Capitol Hill are over the bank using the trading desk for their own benefit rather than providing loans to businesses and home buyers. The banks are using taxpayer money to line their pocket with leveraged trades. All they are today are Hedge Funds insured by the US Government. That is why the Finance Index has out performed all other indexes and averages. That I why the Tea Party is getting stronger as they see tax payers are lining the pockets of bank traders at the expense of tax payers.
Now, I am not a Tea Party member, but I do know history. If you go back again in time and read Teddy Roosevelt life story, you will see a similarity of the Robber Baron of the late 19th Century and TR work as a Progressive to change and stop the abuses that were going on at the time.
What stops this? The FED raises short-term rates, the Discount Rate; a rate that does not affect the Average American. It only affects banks and brokers. When this happens bond prices drop as yields move up and the bank losses money on the bonds and their cost of money increases. If the FED raises rates by ¼ of a point or .25% to 1%, what is the effect?
$100,000 invested
$38,300 interest income
$9,000 cost of money
$61,274.51 loss on value of 3.83% bonds in a market where bond yield is now 3.83% - .25% or 4.08%
-$31,974.51 loss on investment.
When that happens the game is over and the banks are now back to where they should be lending money to qualified borrowers and helping the economy grow and employing the fellow who stopped looking for a job.
From Yahoo Finance this is the rate market as it was at 4PM Friday April 16, 2010:
30 Year Fixed
Today: 5.19% Last Week: 5.23%
15 Year Fixed
Today: 4.38% Last Week: 4.48%
1 Year ARM
Today: 3.37% Last Week: 3.89%
30 Year Fixed Jumbo
Today: 5.90% Last Week: 5.95%
5/1 ARM
Today: 3.94% Last Week: 3.97%
3/1 ARM
Today: 4.33% Last Week:4.40%
Study the history books and see why I am saying interest move up and why median home prices will move up.
Gary McKae
Thursday, April 8, 2010
MAYOR McKAE’S BLOG
APRIL 6, 2010
My initial intention was to write you about my experiences as Mayor and Town Council Person of Woodside and how you can interact with Planning Departments when you decide to buy, remodel or build anew. What changed my mind was a visit from a Well-Known Big Bank Mortgage Representative who covers our office. He asked me to give him direction of interest rates. WOW! I thought, a Big Bank is unable to give him direction; I must get my BLOG out!
Then after I wrote the Blog, this came out and I went back to the Blog to add and update.
END OF CHEAP MORTGAGES MAY BE NEAR AS RATES LEAP, Front Page, San Jose Mercury News, Thursday, April 8, 2010
On March 31st the US Government by way of the FED, Federal Reserve System, stopped buying mortgages in the after market. The total is somewhere’s around $1.25 trillion to my recollection. That is 80% of the mortgage market. The FED has kept short-term rates at or near Zero and has no intention of moving rates up at this moment. The major complaint of the Obama Administration has been banks have not been lending to the degree the administration desired. On Good Friday we had two bombshells explode, first was the employment/unemployment numbers and the other was the direction of bond trading on the shortened day. Most other markets except bonds and futures were closed, and they were only open for a partial trading session.
As I have said or written in the past, I expected rates to move up. I expect home prices to increase and right now I think you could see a substantial pop in home prices, as inventories are low. What will cause this all to happen?
With the FED buying bonds rates were kept artificially low and the spread between US Government Debt and Mortgage Debt had a lower or narrower than normal relationship. In addition to the spread difference banks were unwilling to lend until they knew the direction of rates and the removal of the artificial peg created by US Government buying. While there were buyers of real estate, many of them were frustrated over the terms and conditions and underwriting necessary to complete a loan. The major road block had been the terms the US Government had put on buying bonds in the after market and the terms FANNIE MAE and FREDDIE MAC put on buying the bonds. With the banks belief rates were artificially low they failed to issue loans for their portfolios to other than strong clients with long term relationships, in my opinion
The POP or Bombshells we had on Good Friday was better than expected employment numbers added to continuing good numbers on the economic recovery. A recovery that appears to be without inflation to make things even better! The US Dollar rallied and interest rates went up. When trading began on Monday morning 30-year treasuries touched 5%, and 10-year US Treasuries hit 4%!
The Dollar continued its rally as Greece remained a question and the Euro remained under selling pressure.
I asked him where are conventional 30-years mortgages, and Jumbo’s at? 5.25% and 5.75% he said. Gone are the days of 4.75% where I advised all of you to load up on! But, he said, I don’t know how long they will last, that’s why I am here. Where do you think the rates will go? I said, 6.5% on jumbo’s and the floodgates of loan availability will open. His next comment was what about housing prices? My next comment was a move back to my Bull Whip Economics, A big POP in prices I said.
Why 6.5%, how did I come up with that number? That is simple, the mortgage rates at the time prior to the FED Mortgage Buying Program was 6%! It is reasonable to assume mortgage rates will move up to that level. I gave another ½% for the printing presses and U.S. government spending. Frankly, I expect we will see 7% within a year and a half.
What else makes me believe that mortgage rates will move to 6.5%? It has to do with the spread relationship between 30-year US Treasuries and Mortgages. If you look at conventional and jumbo loans at 5.25% and 5.75% and the 30-year trading at a 5% yield the spread is too narrow. There should be at least a 100 basis point (1%) spread.
On the floodgates opening, it is my opinion that the spread between cost of funds, short term interest rates and long term mortgages will open up to give bankers the spread that guarantees them a profit and their ability to manage their portfolio of loans by maturity.
My next call was to check with a well-known architect who works with builders over his outlook for the market and his workload. I have many clients looking to build but they are waiting, he said. Waiting for what, I said, a signal. I guess so, he said, but based upon the inventory out there, I expect a POP in prices as they all scramble for homes to buy, blow down and build new. What about those that are in the planning stage, how are they doing. Looking for financing, he said.
To me, that all ads up to the Bull Whip hitting the backside of home prices. Why the Bull Whip? It is all about money and availability of credit. Liquidity moves prices. When you have a lack of liquidity prices goes down. The availability of liquidity prices go up. Banks create liquidity. The FED creates liquidity to the Banks. Value is all in the eyes of the beholder. If cash is available to buy value is there. If cash is not available value goes down to the level of available liquidity. Do you remember the Law of Supply and Demand from Economics 101?
Again I tell you get out and buy today! If you have great credit and can get loan commitments you are in the drivers seat. You can call your prices. Don’t wait until the bell rings; the door of opportunity is not going to expand to you and all the others who decide to buy. It always happens, one day 3 people call for the same house and a bidding war ensues. It doesn’t matter how long it has been on the market. I recently spoke to a manager of another office who told me about that situation of there agents in his office putting offers in on a property in Portola Valley which was on the market for 6 months and then POP, the Bull Whip hit and it became a bidding war.
The final comment I need to add is a comment from CNBC. Just as I finished my commentary, the “bing” rang on my IPhone and CNBC announced that, “Most Americans Say Now Is the Time to Buy a House: Poll”. The article goes on to say that nearly two-thirds of Americans think the time is right to buy a house, with a majority believing prices will be the same of higher over the next year. The poll comes from a survey released by Fannie Mae today, Tuesday, April 6, 2010. I will be emailing the link to you later today.
See the attachment for more on Where Rates Are Heading.
Good Buy! Gary McKae
APRIL 6, 2010
My initial intention was to write you about my experiences as Mayor and Town Council Person of Woodside and how you can interact with Planning Departments when you decide to buy, remodel or build anew. What changed my mind was a visit from a Well-Known Big Bank Mortgage Representative who covers our office. He asked me to give him direction of interest rates. WOW! I thought, a Big Bank is unable to give him direction; I must get my BLOG out!
Then after I wrote the Blog, this came out and I went back to the Blog to add and update.
END OF CHEAP MORTGAGES MAY BE NEAR AS RATES LEAP, Front Page, San Jose Mercury News, Thursday, April 8, 2010
On March 31st the US Government by way of the FED, Federal Reserve System, stopped buying mortgages in the after market. The total is somewhere’s around $1.25 trillion to my recollection. That is 80% of the mortgage market. The FED has kept short-term rates at or near Zero and has no intention of moving rates up at this moment. The major complaint of the Obama Administration has been banks have not been lending to the degree the administration desired. On Good Friday we had two bombshells explode, first was the employment/unemployment numbers and the other was the direction of bond trading on the shortened day. Most other markets except bonds and futures were closed, and they were only open for a partial trading session.
As I have said or written in the past, I expected rates to move up. I expect home prices to increase and right now I think you could see a substantial pop in home prices, as inventories are low. What will cause this all to happen?
With the FED buying bonds rates were kept artificially low and the spread between US Government Debt and Mortgage Debt had a lower or narrower than normal relationship. In addition to the spread difference banks were unwilling to lend until they knew the direction of rates and the removal of the artificial peg created by US Government buying. While there were buyers of real estate, many of them were frustrated over the terms and conditions and underwriting necessary to complete a loan. The major road block had been the terms the US Government had put on buying bonds in the after market and the terms FANNIE MAE and FREDDIE MAC put on buying the bonds. With the banks belief rates were artificially low they failed to issue loans for their portfolios to other than strong clients with long term relationships, in my opinion
The POP or Bombshells we had on Good Friday was better than expected employment numbers added to continuing good numbers on the economic recovery. A recovery that appears to be without inflation to make things even better! The US Dollar rallied and interest rates went up. When trading began on Monday morning 30-year treasuries touched 5%, and 10-year US Treasuries hit 4%!
The Dollar continued its rally as Greece remained a question and the Euro remained under selling pressure.
I asked him where are conventional 30-years mortgages, and Jumbo’s at? 5.25% and 5.75% he said. Gone are the days of 4.75% where I advised all of you to load up on! But, he said, I don’t know how long they will last, that’s why I am here. Where do you think the rates will go? I said, 6.5% on jumbo’s and the floodgates of loan availability will open. His next comment was what about housing prices? My next comment was a move back to my Bull Whip Economics, A big POP in prices I said.
Why 6.5%, how did I come up with that number? That is simple, the mortgage rates at the time prior to the FED Mortgage Buying Program was 6%! It is reasonable to assume mortgage rates will move up to that level. I gave another ½% for the printing presses and U.S. government spending. Frankly, I expect we will see 7% within a year and a half.
What else makes me believe that mortgage rates will move to 6.5%? It has to do with the spread relationship between 30-year US Treasuries and Mortgages. If you look at conventional and jumbo loans at 5.25% and 5.75% and the 30-year trading at a 5% yield the spread is too narrow. There should be at least a 100 basis point (1%) spread.
On the floodgates opening, it is my opinion that the spread between cost of funds, short term interest rates and long term mortgages will open up to give bankers the spread that guarantees them a profit and their ability to manage their portfolio of loans by maturity.
My next call was to check with a well-known architect who works with builders over his outlook for the market and his workload. I have many clients looking to build but they are waiting, he said. Waiting for what, I said, a signal. I guess so, he said, but based upon the inventory out there, I expect a POP in prices as they all scramble for homes to buy, blow down and build new. What about those that are in the planning stage, how are they doing. Looking for financing, he said.
To me, that all ads up to the Bull Whip hitting the backside of home prices. Why the Bull Whip? It is all about money and availability of credit. Liquidity moves prices. When you have a lack of liquidity prices goes down. The availability of liquidity prices go up. Banks create liquidity. The FED creates liquidity to the Banks. Value is all in the eyes of the beholder. If cash is available to buy value is there. If cash is not available value goes down to the level of available liquidity. Do you remember the Law of Supply and Demand from Economics 101?
Again I tell you get out and buy today! If you have great credit and can get loan commitments you are in the drivers seat. You can call your prices. Don’t wait until the bell rings; the door of opportunity is not going to expand to you and all the others who decide to buy. It always happens, one day 3 people call for the same house and a bidding war ensues. It doesn’t matter how long it has been on the market. I recently spoke to a manager of another office who told me about that situation of there agents in his office putting offers in on a property in Portola Valley which was on the market for 6 months and then POP, the Bull Whip hit and it became a bidding war.
The final comment I need to add is a comment from CNBC. Just as I finished my commentary, the “bing” rang on my IPhone and CNBC announced that, “Most Americans Say Now Is the Time to Buy a House: Poll”. The article goes on to say that nearly two-thirds of Americans think the time is right to buy a house, with a majority believing prices will be the same of higher over the next year. The poll comes from a survey released by Fannie Mae today, Tuesday, April 6, 2010. I will be emailing the link to you later today.
See the attachment for more on Where Rates Are Heading.
Good Buy! Gary McKae
Market Matters Beyond the Headlines
Mayor McKae’s Blog March 19, 2010
Subject: Market Matters Beyond the Headlines: Nabbing bargain basement about to end?
I have attached an article from the Wall Street Journal specially formatted for consumers. You are welcome to print it, share it via email or post it on your social websites.
At the end of this month the Federal Reserve will stop buying mortgages in the after market. Many analysts predict a rise in interest rates by year end.
MAKING SENSE OF THE STORY FOR CONSUMERS
Interest rates have hovered at or near historic lows for much of the past 18 months, resulting in lower payments for many borrowers. With the Fed discontinuing its purchase program, some analysts believe a rise in interest rates could range from 0.25 percent to as much as 1 percent by the end of 2010.
The federal tax credit for home buyers also is scheduled to end April 30. The tax credit combined with the expectation interest rates will increase has created a sense of urgency for many home buyers. In fact, 23 percent of California home buyers purchased a home in 2009 due to the perception that interest rates will rise and they would be priced out of the market, according to California Association of Realtors otherwise to be known as C Association of Realtors 2009 Survey of California Home Buyers.
Rising interest rates will have an effect on home buyers. For example, a qualified couple with a combined pretax income of $100,000 per year and debt obligations (excluding mortgage) of $500 who receive a mortgage rate of 5 percent could qualify for a loan of up to $590,000, assuming a 20 percent down payment. If the interest rate were to rise to 6 percent, as analysts at Barclays Capital predict, the same couple could only qualify for a mortgage of $540,000.
By JAMES R. HAGERTY
Is it time to rush out and buy a house before mortgage rates go up?
As the Federal Reserve winds down its intervention in the mortgage market, rates on home loans are generally expected to rise at least modestly during the rest of this year from today's unusually low levels. Some analysts believe mortgage rates will jump to around 6% by year end from 5% in recent weeks, while others see only a slight increase.
Meanwhile, federal tax credits available for some home buyers are due to expire at the end of April, adding to the sense of urgency many shoppers feel.
"I'd hate to miss out on really low [mortgage] rates" or the tax credit, says Jennifer Hale, a veterinarian who is looking for a new home near Minneapolis with her fiancé, Lawrence Nystrom.
If rates do go up sharply, that will have a big effect on home buyers. Richard Redmond, a mortgage adviser at All California Mortgage in Larkspur, Calif., offers the example of a couple with combined pretax income of $100,000 a year and debt obligations (excluding mortgage) of $500 a month. At a 5% mortgage rate, he figures, the couple could qualify for a loan big enough to buy a $590,000 house, assuming a 20% down payment. At 6%, that would fall to $540,000.
Since late 2008, 30-year fixed-rate mortgages have been available for people with strong credit records at around 5%, near the lowest levels since the 1950s, thanks to the Federal Reserve's heavy purchases of mortgage securities. At the end of March, the Fed is due to stop buying the securities. Most mortgage analysts think the immediate effect of the Fed's withdrawal will be modest.
More Weekend Investor
Where to Find the Money
Intelligent Investor: Why You Should Get a Bigger Slice of Earnings
Tax Report: File Away, but Pick the Right Status
Coupon Clipping: Playing a Calmer Corporate-Bond Market
Getting Going: The Home-Credit Derby Has Its Price
Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York, estimates that the Fed move will add a maximum of about 0.25 percentage point to mortgage rates. "There is a lot of private money on the sidelines," waiting to buy mortgage securities once the Fed stops gobbling most of them up, Ms. Goodman says. She points to banks, money managers and foreign investors.
What happens to interest rates over the rest of this year depends on many factors that are hard to predict, including the strength of the economy, Fed policies and foreign investors' willingness to buy U.S. debt.
Projections vary widely. At the lower end of the scale, analysts at Credit Suisse and FTN Financial Capital Markets forecast that mortgage rates will be in a range of roughly 5% to 5.25% at the end of 2010. Moody's Economy.com projects about 5.7%, and Barclays Capital 6%. Barclays cites a general rise in interest rates propelled by heavy government borrowing and a strengthening economy as the main factors.
John W. Anderson, a broker at Twin Oaks Realty of Crystal, Minn., who is helping Ms. Hale and Mr. Nystrom search for a house, says the tax credit and fear of higher interest rates are motivating buyers "to move a little faster." But he cautions against moving too fast because of the risk of overpaying or ending up with a home you don't really like. "Getting the right home is the No. 1 thing," he says.
Subject: Market Matters Beyond the Headlines: Nabbing bargain basement about to end?
I have attached an article from the Wall Street Journal specially formatted for consumers. You are welcome to print it, share it via email or post it on your social websites.
At the end of this month the Federal Reserve will stop buying mortgages in the after market. Many analysts predict a rise in interest rates by year end.
MAKING SENSE OF THE STORY FOR CONSUMERS
Interest rates have hovered at or near historic lows for much of the past 18 months, resulting in lower payments for many borrowers. With the Fed discontinuing its purchase program, some analysts believe a rise in interest rates could range from 0.25 percent to as much as 1 percent by the end of 2010.
The federal tax credit for home buyers also is scheduled to end April 30. The tax credit combined with the expectation interest rates will increase has created a sense of urgency for many home buyers. In fact, 23 percent of California home buyers purchased a home in 2009 due to the perception that interest rates will rise and they would be priced out of the market, according to California Association of Realtors otherwise to be known as C Association of Realtors 2009 Survey of California Home Buyers.
Rising interest rates will have an effect on home buyers. For example, a qualified couple with a combined pretax income of $100,000 per year and debt obligations (excluding mortgage) of $500 who receive a mortgage rate of 5 percent could qualify for a loan of up to $590,000, assuming a 20 percent down payment. If the interest rate were to rise to 6 percent, as analysts at Barclays Capital predict, the same couple could only qualify for a mortgage of $540,000.
By JAMES R. HAGERTY
Is it time to rush out and buy a house before mortgage rates go up?
As the Federal Reserve winds down its intervention in the mortgage market, rates on home loans are generally expected to rise at least modestly during the rest of this year from today's unusually low levels. Some analysts believe mortgage rates will jump to around 6% by year end from 5% in recent weeks, while others see only a slight increase.
Meanwhile, federal tax credits available for some home buyers are due to expire at the end of April, adding to the sense of urgency many shoppers feel.
"I'd hate to miss out on really low [mortgage] rates" or the tax credit, says Jennifer Hale, a veterinarian who is looking for a new home near Minneapolis with her fiancé, Lawrence Nystrom.
If rates do go up sharply, that will have a big effect on home buyers. Richard Redmond, a mortgage adviser at All California Mortgage in Larkspur, Calif., offers the example of a couple with combined pretax income of $100,000 a year and debt obligations (excluding mortgage) of $500 a month. At a 5% mortgage rate, he figures, the couple could qualify for a loan big enough to buy a $590,000 house, assuming a 20% down payment. At 6%, that would fall to $540,000.
Since late 2008, 30-year fixed-rate mortgages have been available for people with strong credit records at around 5%, near the lowest levels since the 1950s, thanks to the Federal Reserve's heavy purchases of mortgage securities. At the end of March, the Fed is due to stop buying the securities. Most mortgage analysts think the immediate effect of the Fed's withdrawal will be modest.
More Weekend Investor
Where to Find the Money
Intelligent Investor: Why You Should Get a Bigger Slice of Earnings
Tax Report: File Away, but Pick the Right Status
Coupon Clipping: Playing a Calmer Corporate-Bond Market
Getting Going: The Home-Credit Derby Has Its Price
Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York, estimates that the Fed move will add a maximum of about 0.25 percentage point to mortgage rates. "There is a lot of private money on the sidelines," waiting to buy mortgage securities once the Fed stops gobbling most of them up, Ms. Goodman says. She points to banks, money managers and foreign investors.
What happens to interest rates over the rest of this year depends on many factors that are hard to predict, including the strength of the economy, Fed policies and foreign investors' willingness to buy U.S. debt.
Projections vary widely. At the lower end of the scale, analysts at Credit Suisse and FTN Financial Capital Markets forecast that mortgage rates will be in a range of roughly 5% to 5.25% at the end of 2010. Moody's Economy.com projects about 5.7%, and Barclays Capital 6%. Barclays cites a general rise in interest rates propelled by heavy government borrowing and a strengthening economy as the main factors.
John W. Anderson, a broker at Twin Oaks Realty of Crystal, Minn., who is helping Ms. Hale and Mr. Nystrom search for a house, says the tax credit and fear of higher interest rates are motivating buyers "to move a little faster." But he cautions against moving too fast because of the risk of overpaying or ending up with a home you don't really like. "Getting the right home is the No. 1 thing," he says.
Monday, March 1, 2010
Today's Market Looking A Lot Like '75
January 31, 2010 Commentary
New Homes Sales fell 7.6% in December and median home prices increased 5.2% (What are the figures hiding?)
Existing Homes sales sink the month after the federal tax credit was slated to expire
Existing year over year sales up 15%
Obama and Crew under pressure
Bernanke approved
FED to stop buying bonds
January a loser month for the stock market, what is the forecast?
More sales off MLS in Silicon Valley?
When I look at 2010 I recall my forecast from 2009. I saw that merger and acquisition activity would be high, I saw that major corporations would see that it was cheaper to buy than to build. I saw that commodity prices would stop their upward move as buyers of commodities for a store of value would revaluate their position as the US$ gain in strength. I also saw that real estate would become the new store of value and the US$ would begin a move bank into confidence.
Let’s look at the present situation. President Obama’s honeymoon is over. He does not walk on water and neither do the “super majority” democrats elected on Obama’s coat tails. The economy has not turned around on a dime and “change you can believe in” has become the SOS, not to be confused with save our souls or save our ship, of prior political campaigns. The plus is that we have stopped an economic melt down and the negative is the banks are doing the business that created the nightmare we watched occur.
What does that all mean for us who are looking to buy or sell real estate? I think it is very positive. Of course you may think he is a sales man. He makes money whether we buy or sell. That is not my objective. I don’t want you to sell or buy unless there is value in your action or you are achieving goals you established. What I see is that we are returning back to the market after the recession of 1974.
If you look back to 1975 and the aftermath of the greatest bear market since the great depression we had a complete dissatisfaction of investors in the stock market and the bond market. It did not matter back then where you invested, you lost money. Gold soared, inflation soared and the economy was stagnant, it was called stagflation. Today we are somewhere at the beginning of 1975-76. Unemployment is still high, 10% or more, economic growth is slowly coming around, banks are trying to re-build their balance sheets and REO’s abound!
But today things are a bit worse. The banks are evil! Davos has told the banks regulation is around the corner. Populism and Progressivism are in vogue and those who are “flower children of the 60’s say “whoopee”.
Now with all this negative commentary, is there a light at the end of the tunnel to copy a Nixon’s comment on Vietnam?
I think of it like Buffet, the sage of Omaha. Warren is no different than my colleagues from the trading floor on the Chicago Commodity Exchanges. They said when prices collapse and the blood on the floor reaches the top of your boot tops, look to buy! Well we don’t have any blood to our boot tops, but if you listen to the media you swear it is there.
Let me give you some interesting observations. Inventory in our area are at lows in the prime areas of Woodside, Menlo Park, Atherton, Portola Valley and select sections of Redwood City. Do you know that in Emerald Hills there were 42 home sales in the last 180 days? Do you know that with in the last 30 days buyers of homes in Atherton in the multi-million dollar range went directly to builders and contractor to buy homes that will never show in the statistics of the MLS? I have three situations where this has occurred in the plus $10 million range. I had one contractor tell me that he had a woman come to him and said she wanted to buy the partially completed house. He said not for sale. She wrote him a check for $14 million on the pot and said, now will you sell and complete the house? He sold the house. Do you know that contractors and investors are looking actively for prime properties in Menlo Park (Allied Arts especially), Portola Valley, Woodside and Atherton with the view of knocking down and building 9-18 months from today? Do you know that venture capital pools in recent months have had a number of “blind pool real estate funds” presented to venture fund investors. Do you know that real estate brokers and agents are constantly being called with requests for listings before they go on MLS?
This does not sound like the doom and gloom of the media. But of course, the media needs to sell doom and gloom. How else would they exist? Would you buy a paper that said all is well, the sun is out the days are pleasant, it is Hawaiian weather in our economic and daily lives? Of course not!
Let’s look at reality. Interest rates are rising if you have not noticed. The FED, that is Mr. Bernanke’s organization, has stated they will keep near term interest rates at or near to zero. Surprise is we have the first dissention in the FED vote. The recent bond offering on 10 year bonds and greater has seen less interest and rates have risen. This is very good. That means the yield curve in rising and banks love that. Why do banks love that? Because, my dear friends, banks borrow near and lend long. If rates are near zero near term and they can lend long term they make the spread. Of course if they continue their proprietary trading, unless President Obama stops them. Banks will look at the reserves they have and make a decision on weather it is within their risk reward criteria to lend long term. If long term rates are at long term historic lows and monetary expansion indicates inflation they will not lend. If they see economic growth and a spread between long term rates and the inflation rate as a positive spread they will lend. So what does that mean for real estate? It means prices move up and or at worst, stabilize and mortgage rate increase. The only reason long term rates have not increased due to the heavy US borrowing is simply that the FED had been buying bond in the long term market. As of March 31, 2010 that ends. INTEREST RATES WLL GO UP!
When we reach December 31.2010 we will see higher interest rates on mortgages, we will see an active real estate market and we will see mortgages back to the sensibility of the 70’s and 80’s where it will be 20-25% down 4 to one income to mortgage payment ratios.
We are in an interesting market. Homes in Silicon Valley have an inherent price stability based upon our strong economic base and our strong employment base. We are not in the rust belt; we are not dependent on Wall Street and The Belt Way. We have ingenuity, innovation and a highly educated work force. In addition we still have an excellent educational system of public and private schools. Don’t SELL SILICON VALLEY SHORT!!!
See you in two weeks. Gary
New Homes Sales fell 7.6% in December and median home prices increased 5.2% (What are the figures hiding?)
Existing Homes sales sink the month after the federal tax credit was slated to expire
Existing year over year sales up 15%
Obama and Crew under pressure
Bernanke approved
FED to stop buying bonds
January a loser month for the stock market, what is the forecast?
More sales off MLS in Silicon Valley?
When I look at 2010 I recall my forecast from 2009. I saw that merger and acquisition activity would be high, I saw that major corporations would see that it was cheaper to buy than to build. I saw that commodity prices would stop their upward move as buyers of commodities for a store of value would revaluate their position as the US$ gain in strength. I also saw that real estate would become the new store of value and the US$ would begin a move bank into confidence.
Let’s look at the present situation. President Obama’s honeymoon is over. He does not walk on water and neither do the “super majority” democrats elected on Obama’s coat tails. The economy has not turned around on a dime and “change you can believe in” has become the SOS, not to be confused with save our souls or save our ship, of prior political campaigns. The plus is that we have stopped an economic melt down and the negative is the banks are doing the business that created the nightmare we watched occur.
What does that all mean for us who are looking to buy or sell real estate? I think it is very positive. Of course you may think he is a sales man. He makes money whether we buy or sell. That is not my objective. I don’t want you to sell or buy unless there is value in your action or you are achieving goals you established. What I see is that we are returning back to the market after the recession of 1974.
If you look back to 1975 and the aftermath of the greatest bear market since the great depression we had a complete dissatisfaction of investors in the stock market and the bond market. It did not matter back then where you invested, you lost money. Gold soared, inflation soared and the economy was stagnant, it was called stagflation. Today we are somewhere at the beginning of 1975-76. Unemployment is still high, 10% or more, economic growth is slowly coming around, banks are trying to re-build their balance sheets and REO’s abound!
But today things are a bit worse. The banks are evil! Davos has told the banks regulation is around the corner. Populism and Progressivism are in vogue and those who are “flower children of the 60’s say “whoopee”.
Now with all this negative commentary, is there a light at the end of the tunnel to copy a Nixon’s comment on Vietnam?
I think of it like Buffet, the sage of Omaha. Warren is no different than my colleagues from the trading floor on the Chicago Commodity Exchanges. They said when prices collapse and the blood on the floor reaches the top of your boot tops, look to buy! Well we don’t have any blood to our boot tops, but if you listen to the media you swear it is there.
Let me give you some interesting observations. Inventory in our area are at lows in the prime areas of Woodside, Menlo Park, Atherton, Portola Valley and select sections of Redwood City. Do you know that in Emerald Hills there were 42 home sales in the last 180 days? Do you know that with in the last 30 days buyers of homes in Atherton in the multi-million dollar range went directly to builders and contractor to buy homes that will never show in the statistics of the MLS? I have three situations where this has occurred in the plus $10 million range. I had one contractor tell me that he had a woman come to him and said she wanted to buy the partially completed house. He said not for sale. She wrote him a check for $14 million on the pot and said, now will you sell and complete the house? He sold the house. Do you know that contractors and investors are looking actively for prime properties in Menlo Park (Allied Arts especially), Portola Valley, Woodside and Atherton with the view of knocking down and building 9-18 months from today? Do you know that venture capital pools in recent months have had a number of “blind pool real estate funds” presented to venture fund investors. Do you know that real estate brokers and agents are constantly being called with requests for listings before they go on MLS?
This does not sound like the doom and gloom of the media. But of course, the media needs to sell doom and gloom. How else would they exist? Would you buy a paper that said all is well, the sun is out the days are pleasant, it is Hawaiian weather in our economic and daily lives? Of course not!
Let’s look at reality. Interest rates are rising if you have not noticed. The FED, that is Mr. Bernanke’s organization, has stated they will keep near term interest rates at or near to zero. Surprise is we have the first dissention in the FED vote. The recent bond offering on 10 year bonds and greater has seen less interest and rates have risen. This is very good. That means the yield curve in rising and banks love that. Why do banks love that? Because, my dear friends, banks borrow near and lend long. If rates are near zero near term and they can lend long term they make the spread. Of course if they continue their proprietary trading, unless President Obama stops them. Banks will look at the reserves they have and make a decision on weather it is within their risk reward criteria to lend long term. If long term rates are at long term historic lows and monetary expansion indicates inflation they will not lend. If they see economic growth and a spread between long term rates and the inflation rate as a positive spread they will lend. So what does that mean for real estate? It means prices move up and or at worst, stabilize and mortgage rate increase. The only reason long term rates have not increased due to the heavy US borrowing is simply that the FED had been buying bond in the long term market. As of March 31, 2010 that ends. INTEREST RATES WLL GO UP!
When we reach December 31.2010 we will see higher interest rates on mortgages, we will see an active real estate market and we will see mortgages back to the sensibility of the 70’s and 80’s where it will be 20-25% down 4 to one income to mortgage payment ratios.
We are in an interesting market. Homes in Silicon Valley have an inherent price stability based upon our strong economic base and our strong employment base. We are not in the rust belt; we are not dependent on Wall Street and The Belt Way. We have ingenuity, innovation and a highly educated work force. In addition we still have an excellent educational system of public and private schools. Don’t SELL SILICON VALLEY SHORT!!!
See you in two weeks. Gary
Tuesday, January 12, 2010
GUNG HAY FAT CHOY
GUNG HAY FAT CHOY
HAOLE MKA HIKI HO
It has been over 26 years since I left Hawaii to work the “mainland” as we Hawaiians refer to this part of America, so forgive me if my spelling is incorrect. It says, Happy New Year!
2009 IN REVIEW
This being December 31, 2009, I will spend this letter reviewing the past year per my letters and give you a forecast of the new decade of 2010.
December 30, 2008 I stated that the banks were holding onto their “bail out” funds from the Federal Reserve programs. That has remained to be the case throughout 2009. That lack or reluctance of banks to lend from the reserves created by the Federal Reserve ‘ investment in banks or from the TARP program has remained. I stated then that banks had “free” money at 0% and they would invest at 3% and make the spread to repair their balance sheets and take no risk in providing loans to the American Economy. That has been the case as the major “too big to fail” banks have repaid the investment of the FED. The key to these reserves and their ability to finance the expansion will be dealt with in 2010 forecast forward.
January 10, 20009 I wrote,
• “About a month ago I wrote you on the interest rate situation, TBills and Tbonds, mortgage rates and other related items. Today we have seen much of what I stated begin to see fruit. Interest rates have risen on Tbills and Tbonds. On December 18, 2008 the 30-year TBonds hit a low yield of 2.546% return, on January 6, 2009 the yield rose to 3.06%. Mortgage rates declined and money became available for mortgages.”….
• “2009 and where do we go? The first thing to remember is that money in circulation is inflationary. Sooner or later the money from TARP and the Bailouts will be taken off the balance sheets in the form of Tbills and Tbonds and go into the economic system. When it does it will cause prices to rise. If you haven’t notices, the price of gas is now up 10-15 cents a gallon and oil is up over $10 a barrel.”
On February 12, I wrote that I expected growth to come from “Platform” companies. I was wrong in that point. Growth has come from economizing of companies. Economy has come from lay offs and cutting on expenses. In reality there has been no growth but a rebound in earnings due to cutting of costs. That has not bided well for the American Worker.
The key to 2009 and our rebound is found in the April 4th letter. Confidence and a return of the acceptance of “risk” sums it all up. Homes sold quickly ion March and April after almost nothing from the prior 6 months.
By Mid-Year (June/July) not only were homes selling in our area, they were closing escrow. The fear I had in late spring was that all the offers that took the homes to pending would have closing problems as new underwriting terms were instituted. Buyers in Woodside, Palo Alto, Portola Valley and Menlo Park had money and good credit. The only slow down was in the time it took to close a transaction, 30 to 45 days were now the norm.
Fall 2009 brought about an 11% jump in homes sales, an increase of 7.2% in existing homes sales and the first time in 5 years that home sales increased 4 months in a row. Inventories began to decline, but unemployment in Silicon Valley continued to rise.
As leaves began to fall and pumpkins began to have smiles on their toothy or tooth-less faces homes sales continued to rise; but also so had commodity prices. The US$ was falling and offshore investors were looking for hedges for their dollar reserves and gold and commodities became a store of value. With that came the realization that the offshore investor was now becoming a noticeable factor in Silicon Valley as realtors were giving tours to visiting Asian Buyers.
While everyone planned for Thanksgiving the disparity between new homes sales and existing home sales became evident. The prices to build new homes had escalated due to the rise in commodity prices and existing homes were selling for less than construction cost to replace them.
As Santa approached and retailers looked to keep their stores open another year, housing starts continued to fall and inventories of homes for sale declined.
In summary, 2009 was not a bad year. The inventory of homes that all feared would cause a collapse in housing and a new depression did not occur. Sellers became more confident of the future and pulled homes from the market when the price did not confirm to what they felt their home was worth. Buyers on the other hand had confidence and the return to normal was beginning to occur. Existing homebuyers remodeled and obtained financing at historically low rates with substantial down payments. The buyer of the multi-million dollar property now came up with enough of a down payment to qualify and obtain a low interest small mortgage. A major change from the past, but in reality a return to way things were done in the not too distant past. Interest rates remained low and slowly more mortgages were available from numerous sources other than “too big to fail” banks.
2010 FORECAST
The key to 2010 is, or was, the key to 2009, THE RETURN OF RISK ACCEPTANCE.
We all became complacent with the various investments available prior to the fall of Lehman Brothers. If it had “insured” we invested. Money Market funds were well proven and many failed to consider the downside as ever a possibility. It had the makings of a fall. Fall it did and the repercussion was the lack of faith in anything other than U.S. Government Bonds, ergo, 0% on U.S. Treasury Bills. 2009 brought faith back into the investor mentality. Investors are need in a capitalistic system in order for the system to grow. Without investors it is a barren wilderness. Individual Investors can only go so far until the need of Institutional Investors are required. To understand Institutional Investors you must understand the “Prudent Man Principal”. Institutional Investors are fiduciaries. They are legally liable for the lost of funds placed in their care through the failure to follow the “Prudent Man Principal”. Prudence was waiting to repair one’s own house then waiting to determine if the system would survive. So it has, we did not fall and the system survived.
What justifies that comment, mergers and acquisitions are the answer. This will be one source of growth in 2010. Corporations that held large amounts of cash or had pristine credit ratings began to buy. With the purchase of companies, shareholders’ were liquefied. That liquidity will come back into the capitalistic system. It will come back in equity or debt, but come back it will. Whether the investor puts the money in a savings account or directly into the system the funds go back into the economy.
Where else will money come from to expand our growth? The “too big to fail banks” will be a major source. For most of 2009 the cry heard from economist was that bank reserves created by Tax Payer money was not flowing back into the economy. That is easy to understand. For all that one knows and hates about banks and bankers, they do know lending and interest rates and risk. They don’t know squat about running an investment bank or a trading operation, but they do know interest rates and risk of return of capital. With “insured” and “guaranteed” now only in the hands of the U. S. Government, banks can make sensible decisions on lending money. Here I go by my dear departed Father’s comments to me as a very young boy, “use your common sense”. Would a bank lend money long term at the historically lowest rate to waiting long term to regain it when inflation through the debasement of our currency through deficit funding was evident? Stupid, a fiduciary mistake and it could put them not only out of a job but next to Madoff making license plates.
I expect that interest rates will increase from 2010 forward. I expect a slow growth in lending from banks as they balance foreclosures, REO’s and Short Sales as they pray commercial loans remain balanced in their portfolios. I expect “median home prices” to increase. The increase will not come from increase values of homes, but from the sale of high-end homes; where to fore, the median home prices were composed of foreclosures, REO’s and Short Sales. I expect investors to begin to look at existing homes to buy at a discount, remodel and flip. I expect the new group of venture funds to be blind pool real estate funds composed of local (U.S.) investors and offshore investors. I expect offshore investors to continue to move their assets into the United States in the form of real estate investments. I expect that it will take a long time for the Dow Jones, S&P and NASDQ to regain their old highs for many years, 10 or more. I expect a picket fence of stock market indices, up and down, to frustrate inventors and that will drive them to real estate as a store of value. I expect the United States to dominate Technology and Innovation and that dominance will continue to draw students to the United States for education and training to help their countries and eventually lead them to relocate to the U.S.
The greatest fear I have is what I fear we may have in the next few years, STAGFLATION! That will be a return to Jimmy Carter and a stagnate economy with inflation. It was great for real estate and it was great for small growth companies and their development, but it was horrible for the U.S. economy. While I didn’t vote for the Kid with the Big Ears, I truly hope he can provide to the U.S. what I and those of my generation felt Jack Kennedy was going to provide. Good Luck Barry, do your best and that is all that you can hope for, with a little luck from above.
Happy New Year to All, and to All a Good Night.
POP!
Cindy come sit next to me by the fire while we watch the Ball Fall in Times Square.
HAOLE MKA HIKI HO
It has been over 26 years since I left Hawaii to work the “mainland” as we Hawaiians refer to this part of America, so forgive me if my spelling is incorrect. It says, Happy New Year!
2009 IN REVIEW
This being December 31, 2009, I will spend this letter reviewing the past year per my letters and give you a forecast of the new decade of 2010.
December 30, 2008 I stated that the banks were holding onto their “bail out” funds from the Federal Reserve programs. That has remained to be the case throughout 2009. That lack or reluctance of banks to lend from the reserves created by the Federal Reserve ‘ investment in banks or from the TARP program has remained. I stated then that banks had “free” money at 0% and they would invest at 3% and make the spread to repair their balance sheets and take no risk in providing loans to the American Economy. That has been the case as the major “too big to fail” banks have repaid the investment of the FED. The key to these reserves and their ability to finance the expansion will be dealt with in 2010 forecast forward.
January 10, 20009 I wrote,
• “About a month ago I wrote you on the interest rate situation, TBills and Tbonds, mortgage rates and other related items. Today we have seen much of what I stated begin to see fruit. Interest rates have risen on Tbills and Tbonds. On December 18, 2008 the 30-year TBonds hit a low yield of 2.546% return, on January 6, 2009 the yield rose to 3.06%. Mortgage rates declined and money became available for mortgages.”….
• “2009 and where do we go? The first thing to remember is that money in circulation is inflationary. Sooner or later the money from TARP and the Bailouts will be taken off the balance sheets in the form of Tbills and Tbonds and go into the economic system. When it does it will cause prices to rise. If you haven’t notices, the price of gas is now up 10-15 cents a gallon and oil is up over $10 a barrel.”
On February 12, I wrote that I expected growth to come from “Platform” companies. I was wrong in that point. Growth has come from economizing of companies. Economy has come from lay offs and cutting on expenses. In reality there has been no growth but a rebound in earnings due to cutting of costs. That has not bided well for the American Worker.
The key to 2009 and our rebound is found in the April 4th letter. Confidence and a return of the acceptance of “risk” sums it all up. Homes sold quickly ion March and April after almost nothing from the prior 6 months.
By Mid-Year (June/July) not only were homes selling in our area, they were closing escrow. The fear I had in late spring was that all the offers that took the homes to pending would have closing problems as new underwriting terms were instituted. Buyers in Woodside, Palo Alto, Portola Valley and Menlo Park had money and good credit. The only slow down was in the time it took to close a transaction, 30 to 45 days were now the norm.
Fall 2009 brought about an 11% jump in homes sales, an increase of 7.2% in existing homes sales and the first time in 5 years that home sales increased 4 months in a row. Inventories began to decline, but unemployment in Silicon Valley continued to rise.
As leaves began to fall and pumpkins began to have smiles on their toothy or tooth-less faces homes sales continued to rise; but also so had commodity prices. The US$ was falling and offshore investors were looking for hedges for their dollar reserves and gold and commodities became a store of value. With that came the realization that the offshore investor was now becoming a noticeable factor in Silicon Valley as realtors were giving tours to visiting Asian Buyers.
While everyone planned for Thanksgiving the disparity between new homes sales and existing home sales became evident. The prices to build new homes had escalated due to the rise in commodity prices and existing homes were selling for less than construction cost to replace them.
As Santa approached and retailers looked to keep their stores open another year, housing starts continued to fall and inventories of homes for sale declined.
In summary, 2009 was not a bad year. The inventory of homes that all feared would cause a collapse in housing and a new depression did not occur. Sellers became more confident of the future and pulled homes from the market when the price did not confirm to what they felt their home was worth. Buyers on the other hand had confidence and the return to normal was beginning to occur. Existing homebuyers remodeled and obtained financing at historically low rates with substantial down payments. The buyer of the multi-million dollar property now came up with enough of a down payment to qualify and obtain a low interest small mortgage. A major change from the past, but in reality a return to way things were done in the not too distant past. Interest rates remained low and slowly more mortgages were available from numerous sources other than “too big to fail” banks.
2010 FORECAST
The key to 2010 is, or was, the key to 2009, THE RETURN OF RISK ACCEPTANCE.
We all became complacent with the various investments available prior to the fall of Lehman Brothers. If it had “insured” we invested. Money Market funds were well proven and many failed to consider the downside as ever a possibility. It had the makings of a fall. Fall it did and the repercussion was the lack of faith in anything other than U.S. Government Bonds, ergo, 0% on U.S. Treasury Bills. 2009 brought faith back into the investor mentality. Investors are need in a capitalistic system in order for the system to grow. Without investors it is a barren wilderness. Individual Investors can only go so far until the need of Institutional Investors are required. To understand Institutional Investors you must understand the “Prudent Man Principal”. Institutional Investors are fiduciaries. They are legally liable for the lost of funds placed in their care through the failure to follow the “Prudent Man Principal”. Prudence was waiting to repair one’s own house then waiting to determine if the system would survive. So it has, we did not fall and the system survived.
What justifies that comment, mergers and acquisitions are the answer. This will be one source of growth in 2010. Corporations that held large amounts of cash or had pristine credit ratings began to buy. With the purchase of companies, shareholders’ were liquefied. That liquidity will come back into the capitalistic system. It will come back in equity or debt, but come back it will. Whether the investor puts the money in a savings account or directly into the system the funds go back into the economy.
Where else will money come from to expand our growth? The “too big to fail banks” will be a major source. For most of 2009 the cry heard from economist was that bank reserves created by Tax Payer money was not flowing back into the economy. That is easy to understand. For all that one knows and hates about banks and bankers, they do know lending and interest rates and risk. They don’t know squat about running an investment bank or a trading operation, but they do know interest rates and risk of return of capital. With “insured” and “guaranteed” now only in the hands of the U. S. Government, banks can make sensible decisions on lending money. Here I go by my dear departed Father’s comments to me as a very young boy, “use your common sense”. Would a bank lend money long term at the historically lowest rate to waiting long term to regain it when inflation through the debasement of our currency through deficit funding was evident? Stupid, a fiduciary mistake and it could put them not only out of a job but next to Madoff making license plates.
I expect that interest rates will increase from 2010 forward. I expect a slow growth in lending from banks as they balance foreclosures, REO’s and Short Sales as they pray commercial loans remain balanced in their portfolios. I expect “median home prices” to increase. The increase will not come from increase values of homes, but from the sale of high-end homes; where to fore, the median home prices were composed of foreclosures, REO’s and Short Sales. I expect investors to begin to look at existing homes to buy at a discount, remodel and flip. I expect the new group of venture funds to be blind pool real estate funds composed of local (U.S.) investors and offshore investors. I expect offshore investors to continue to move their assets into the United States in the form of real estate investments. I expect that it will take a long time for the Dow Jones, S&P and NASDQ to regain their old highs for many years, 10 or more. I expect a picket fence of stock market indices, up and down, to frustrate inventors and that will drive them to real estate as a store of value. I expect the United States to dominate Technology and Innovation and that dominance will continue to draw students to the United States for education and training to help their countries and eventually lead them to relocate to the U.S.
The greatest fear I have is what I fear we may have in the next few years, STAGFLATION! That will be a return to Jimmy Carter and a stagnate economy with inflation. It was great for real estate and it was great for small growth companies and their development, but it was horrible for the U.S. economy. While I didn’t vote for the Kid with the Big Ears, I truly hope he can provide to the U.S. what I and those of my generation felt Jack Kennedy was going to provide. Good Luck Barry, do your best and that is all that you can hope for, with a little luck from above.
Happy New Year to All, and to All a Good Night.
POP!
Cindy come sit next to me by the fire while we watch the Ball Fall in Times Square.
Gold Sweet Gold
Gary’s Market Commentary
• Unemployment unexpectedly drop
• Commodity prices break led by Gold
• Dollar rallies
• What is the real value of a dollar
• Who has all the money and where will growth come from
• Results for November: new listings declining, inventory declining, closed sales declining, days on the market increasing.
The decline in unemployment to 10% was a complete surprise. It put the US$ in a turn around and gold and commodities in a sell of. Of course it was not unexpected as many analyst were calling for a halt in the decline in the US$ and a break in commodity prices especially that of gold. As we come to the end of the year, hedge funds, traders and investors will want to lock in their gains. Clear the decks take profits and lets take home our 20% of the profits, say the Hedge Fund Managers. It will be a big payday for the hedge fund industry. Of course, none of that will accrue to poor Mr., Mrs. and Miss America as they wonder: will they lose their home, keep their job or find a new one.
The rally in the US$ is good for our real estate market. As many wonder about the inventory of foreclosed homes and the potential for a commercial real estate bust; having buyers over seas with US$ to invest is a good omen.
As I stated in my past letters gold and commodities had nothing to do with supply and demand rather it had to do with the store of value. The US$ is basically a worthless security. It represents the “full faith and credit” of the United States of America. There is no Gold backing, no Silver backing; just paper that measures your labor. I recall the term a “fiat” currency from Economics in college. It is a transfer from your hard work and a measurement that allows you to buy something of hard value; like a home, a piece of jewelry, a car, commodities like gold and silver or a security that provides you a return of investment measured in income of equity growth, and goods and services.
Prior to August 15, 1971 the dollar was backed by gold or at least partially. The convertibility of US$ to Gold was in the hands of governments. Then on that date Richard M. Nixon ended the convertibility. The stock market ended its bull cycle in November 1972 and declined to a low and loss not seen since the Great Depression. Inflation soared, commodities soared, gold eventually stopped somewhere around $800 an oz.; but most importantly, real estate became a “store of value”. The foreign investors relied on their local government to convert the amassed US$ into gold put their faith in gold on the open market, commodities and U.S. Real Estate.
Many of you may not realize that the US$ was a gold backed currency for years. It was the Gold backing that helped move the U.S. out of the Great Depression. Yes, the U.S. Government spent billions to get us out and up and it was not until WWII that we really spent enough to get out. Did you know it was not inflationary? The spending from the time of FDR’s election until the end of WWII was financed with Gold at Fort Knox. All the dollars that were created and in circulation were Gold backed. Gold was $20.67 for years until FDR discovered that all he had to do is revalue Gold to $35 per oz. and our currency in circulation could expand by 69%! In fact FDR would joke after taking his breakfast and with cigarette and coffee decide whether to increase Gold another dollar or two.
So where are we today; and is it any different? Not really and yes it is different.
Not really is that the expansion of the US$ during the 60’s was from the Great Society of LBJ and the Viet Nam War. The expansion and deficit funding along with an imbalance in trade created another deficit, a trade deficit. Nations which began to accumulate US$ from their trade imbalance cashed the dollars in for Gold. There was not enough Gold in Fort Knox to cover the US$ in float, so Nixon ended the exchangeability. Too many dollars chasing too little goods resulted in inflation. The U.S. could have funded the Great Society and Viet Nam if there was a positive trade balance in favor of the United States! There was not a favorable balance and inflation was created when convertibility ended. What happened next was that “smart Money” realized that even hard assets, as in Gold and Silver, could become over priced and the next hard asset was Real Estate. What is the key to buying Real Estate? It is LOCATION, LOCATION, and LOCATION. Where is the safest most secure most equal place in the world to live? IT is the United States. So where is LOCATION, LOCATION, LOCATION located? It was then the United States. San Francisco, New York, Los Angeles, Honolulu took off, and then farmland took off as wheat, corn and soybean prices escalated.
What the politicians who created the imbalances missed back in the 60’s and 70’s was that the U.S. was no longer the cheapest and most competitive source of production in the world. The U.S. was losing the competitive edge. The Baby Boomers wanted it now and did not want Dad’s Cadillac, they wanted a BMW, a Mercedes, and Brooks Brothers was passé. The inheritance of the Baby Boom Generation from the Depression Generation’s frugality was spend, spend, “been there, seen that, got that”. A strong dollar and a change in spending attitude by cheap goods overseas was a part of the increasing imbalance of trade.
Today all the ills of the past are coming home. The imbalance of trade, deficit spending, lack of government regulation has created a weaker dollar. The crisis of September 2008, the failure of Lehman Brothers, the breaking of the “buck” by a Money Market Fund created a crisis of faith.
Looking back, where did the excess US$ go in the past and today? They went into Gold, commodities, and real estate. Who owns all those excess US$? China reportedly holds US$2.7 trillion. What backs the Yuan? It is the same thing that backed the U.S.$, competitive and cheap productivity and products. What was the first location the newly rich in China placed their bounty? Hong Kong was the first LOCATION. Today it is said that Hong Kong demands $US 1000 per square foot! Where will and where are those excess US$ looking now? The same place they went in the past, San Francisco, Los Angeles and New York City.
I believe that waiting to buy real estate will be a regret many look back on and regret their failure to act. The US$ you hold is worth only what it can buy. The yield on US Treasuries are lest than the historic inflation rate, the stock market is up over 60%, Gold is up over 50%. So where is the historic store of value that has not risen? You know the answer it is REAL ESTATE. The US Government is subsidizing the purchase of real estate; interest rates on mortgage have never been lower. Waiting will be your error.
The November report on Atherton, Menlo Park, Palo Alto, Portola Valley and Woodside show a decline in inventor, sales and new listings. Sooner or later you will see a “POP” in prices brought on by a “POP” in demand. We, Jim, Craig and I are waiting to help and negotiate for you now. Call us today and arrange a viewing and tour!
• Unemployment unexpectedly drop
• Commodity prices break led by Gold
• Dollar rallies
• What is the real value of a dollar
• Who has all the money and where will growth come from
• Results for November: new listings declining, inventory declining, closed sales declining, days on the market increasing.
The decline in unemployment to 10% was a complete surprise. It put the US$ in a turn around and gold and commodities in a sell of. Of course it was not unexpected as many analyst were calling for a halt in the decline in the US$ and a break in commodity prices especially that of gold. As we come to the end of the year, hedge funds, traders and investors will want to lock in their gains. Clear the decks take profits and lets take home our 20% of the profits, say the Hedge Fund Managers. It will be a big payday for the hedge fund industry. Of course, none of that will accrue to poor Mr., Mrs. and Miss America as they wonder: will they lose their home, keep their job or find a new one.
The rally in the US$ is good for our real estate market. As many wonder about the inventory of foreclosed homes and the potential for a commercial real estate bust; having buyers over seas with US$ to invest is a good omen.
As I stated in my past letters gold and commodities had nothing to do with supply and demand rather it had to do with the store of value. The US$ is basically a worthless security. It represents the “full faith and credit” of the United States of America. There is no Gold backing, no Silver backing; just paper that measures your labor. I recall the term a “fiat” currency from Economics in college. It is a transfer from your hard work and a measurement that allows you to buy something of hard value; like a home, a piece of jewelry, a car, commodities like gold and silver or a security that provides you a return of investment measured in income of equity growth, and goods and services.
Prior to August 15, 1971 the dollar was backed by gold or at least partially. The convertibility of US$ to Gold was in the hands of governments. Then on that date Richard M. Nixon ended the convertibility. The stock market ended its bull cycle in November 1972 and declined to a low and loss not seen since the Great Depression. Inflation soared, commodities soared, gold eventually stopped somewhere around $800 an oz.; but most importantly, real estate became a “store of value”. The foreign investors relied on their local government to convert the amassed US$ into gold put their faith in gold on the open market, commodities and U.S. Real Estate.
Many of you may not realize that the US$ was a gold backed currency for years. It was the Gold backing that helped move the U.S. out of the Great Depression. Yes, the U.S. Government spent billions to get us out and up and it was not until WWII that we really spent enough to get out. Did you know it was not inflationary? The spending from the time of FDR’s election until the end of WWII was financed with Gold at Fort Knox. All the dollars that were created and in circulation were Gold backed. Gold was $20.67 for years until FDR discovered that all he had to do is revalue Gold to $35 per oz. and our currency in circulation could expand by 69%! In fact FDR would joke after taking his breakfast and with cigarette and coffee decide whether to increase Gold another dollar or two.
So where are we today; and is it any different? Not really and yes it is different.
Not really is that the expansion of the US$ during the 60’s was from the Great Society of LBJ and the Viet Nam War. The expansion and deficit funding along with an imbalance in trade created another deficit, a trade deficit. Nations which began to accumulate US$ from their trade imbalance cashed the dollars in for Gold. There was not enough Gold in Fort Knox to cover the US$ in float, so Nixon ended the exchangeability. Too many dollars chasing too little goods resulted in inflation. The U.S. could have funded the Great Society and Viet Nam if there was a positive trade balance in favor of the United States! There was not a favorable balance and inflation was created when convertibility ended. What happened next was that “smart Money” realized that even hard assets, as in Gold and Silver, could become over priced and the next hard asset was Real Estate. What is the key to buying Real Estate? It is LOCATION, LOCATION, and LOCATION. Where is the safest most secure most equal place in the world to live? IT is the United States. So where is LOCATION, LOCATION, LOCATION located? It was then the United States. San Francisco, New York, Los Angeles, Honolulu took off, and then farmland took off as wheat, corn and soybean prices escalated.
What the politicians who created the imbalances missed back in the 60’s and 70’s was that the U.S. was no longer the cheapest and most competitive source of production in the world. The U.S. was losing the competitive edge. The Baby Boomers wanted it now and did not want Dad’s Cadillac, they wanted a BMW, a Mercedes, and Brooks Brothers was passé. The inheritance of the Baby Boom Generation from the Depression Generation’s frugality was spend, spend, “been there, seen that, got that”. A strong dollar and a change in spending attitude by cheap goods overseas was a part of the increasing imbalance of trade.
Today all the ills of the past are coming home. The imbalance of trade, deficit spending, lack of government regulation has created a weaker dollar. The crisis of September 2008, the failure of Lehman Brothers, the breaking of the “buck” by a Money Market Fund created a crisis of faith.
Looking back, where did the excess US$ go in the past and today? They went into Gold, commodities, and real estate. Who owns all those excess US$? China reportedly holds US$2.7 trillion. What backs the Yuan? It is the same thing that backed the U.S.$, competitive and cheap productivity and products. What was the first location the newly rich in China placed their bounty? Hong Kong was the first LOCATION. Today it is said that Hong Kong demands $US 1000 per square foot! Where will and where are those excess US$ looking now? The same place they went in the past, San Francisco, Los Angeles and New York City.
I believe that waiting to buy real estate will be a regret many look back on and regret their failure to act. The US$ you hold is worth only what it can buy. The yield on US Treasuries are lest than the historic inflation rate, the stock market is up over 60%, Gold is up over 50%. So where is the historic store of value that has not risen? You know the answer it is REAL ESTATE. The US Government is subsidizing the purchase of real estate; interest rates on mortgage have never been lower. Waiting will be your error.
The November report on Atherton, Menlo Park, Palo Alto, Portola Valley and Woodside show a decline in inventor, sales and new listings. Sooner or later you will see a “POP” in prices brought on by a “POP” in demand. We, Jim, Craig and I are waiting to help and negotiate for you now. Call us today and arrange a viewing and tour!
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