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