Below find First Centennial Title’s Market Condition Report for the month of June. With phrases like: “No significant change…”; “Little change…”; “A slight increase…”; “Holding constant…”; “No significant movement…” used to describe June’s key metrics, I wonder is this telling of a bottom, or the calm before the storm?
Click on the picture below to access the full report (two pages).
CommercialLender
HTRE,
Stop! Don’t leave! You are very welcome here, and I like your posts. Nevermind the few spoilers.
Truth is, we’ll likely see both inflation and deflation. Go back around a year and you’ll witness some very good, and indepth discussions here on this blog toward this point.
Basically, for now we have a deflationary hangover brought about by prior drunkenness whereby consumers were consuming big ticket items with ever lower perception of risk of their consumption. (Bear with my multi-methaphor thought for a moment). Credit was easy; downpayment requirements were lower; selling and buying partiers were plentiful; bartenders and drink bottlers were everywhere; and this party was open to absolutely everyone without deferrence to their ability to withstand the costs or effects of the alcohol. Low cost and plentiful drinks means more drinking!
So, we are now collectively sobering up and assessing the hangover damage (you say I did WHAT at the party??!!). We are deflating with respect to our demand for these drinks, or big ticket items.
Soon however we’ll have to pay for last night’s party when the bill comes. Taxes will be higher, our currency will be discovered to be worth less thereby the damage will end up costing us more. The bartenders from the night before will no longer extend us credit on fear we won’t pay. Fewer drinkers will mean some drink bottlers will go under. A credit drink will now cost cash, but it will cost more cash than before because of all your fellow partiers who did not yet pay or will not pay their tabs.
Mixed and fun methaphors aside, herein lies the quandry you pose: will the mathematically-certain coming inflation cause housing prices to increase or decrease?
If an increase, then disposable income must increase faster than ordinary expenses in a person’s budget, or otherwise the already stretched ratio of income to housing expense will be stretched further. Taxes must not rise quicker than something else in the budget falls, unless something else is forgone entirely. The cost of housing in real terms (price, interest rates, RE taxes, utilities, down payments) must not rise faster than some other budget line item. You get my point. Now think of the converse where home prices actually continue to fall: income taxes would have risen, rates will have risen, credit will have shrunk, disposable income fallen, other expenses in a person’s budget risen, etc.
For now, we are still deflating, wondering if the coming inflation will cause housing prices to rise, or just other consumable goods’ prices to rise instead, or both. Such a potential shift in demand from housing to other consumables (say, apples in the Weimar Republic) is quite a horrific thought.
Sorry to ramble on, all.
Ebson
Well, I’ll just say it again. I lived here in Reno in the late 70s and early 80s. The inflation rate was 14%. The prime rate went to 21.5% in 1983. Mortgage money was around 19-20%. There were no mortgages being made because nobody could afford it. Houses did still get bought and sold, but not with any new mortgage money. Buyers were making down payments and assuming existing morgtages with wrap around contracts. (In violation of the due-on-sale clause).
The value of houses went absolutely nowhere. Maybe a little bit down, but absolutely not up. Stagnant mostly.
There is a flaw in the thinking that high inflation will automatically bring increased houses values, as suggested by some above. High inflation brings very expensive mortgage money, and that has a big dampening impact on values. At least it did the last time we got into double digit inflation.
Donna
Everybody seems to say that serious inflation is inevitable. When though? We are now almost 2 years since the hundreds of billions in bailouts and the CPI is falling, not rising. (I know the CPI is a cooked number, so let’s not get into that). There seems to be some smart people here. What do you all think?
HighlyTrainedRealEstateAnalyst
CommercialLender,
Thanks for the great post. It was an enjoyable read and certainly not rambling. We are truly at the end of a very long party and the bill has come due.
Donna,
Excellent question as to when inflation will really kick in. Although timeframes are difficult to estimate CommercialLender touched on the answer: inflation will kick in when all of the money that has been “printed” goes into circulation. This will happen when people start spending again and / or the banks stop sitting on it. The two are somewhat related because one scenario involves banks lending it to people so they can spend it. But, nobody has credit, and people are trying to pay down debt which effectively takes money out of circulation because all money creation is based on debt. However, I would argue that in some areas inflation is already rearing its head for essential items that people must have. Food, energy, and the cost of healthcare are a few examples (food and energy are both excluded from the CPI).
As for the affects of the inflation, I fear that Ebson is correct. I was born in 1969, so I only have vague memories of the high interest rates and inflation of that period (I do remember sitting in very long gas lines), but my father and I have talked extensively about this period of time. The inflation was made possible because Nixon took us completely off of the gold window, which decoupled the dollar from gold, and it has increased at a near exponential rate ever since.
As inflation creeps in people have less disposable income, and over the last 10 years the result has been a net decrease in the average income of most Americans. In other words, when one’s income goes up by 3% a year but real inflation is say 5%, then that person has suffered a net decrease in income. During the last couple of years most Americans have seen a decrease in income while real inflation continues to rise, and, when combined with the tightening of credit, this has a major impact on one’s ability to afford a home.
Sleezy
Sounds like macro/micro for dummies…
$12 paperback at barnes n nobles ?
HighlyTrainedRealEstateAnalyst
Sleezy,
Most of what you have to say is speculation that is irrelevant to the topic at hand (See your post above as a perfect example). But, now that Mike Z has informed me that you are the resident “troll” I can safely ignore anything you have to say.
billddrummer
To Donna,
Great question. In my opinion, inflation won’t resurface until there is a surplus of currency bidding for a limited amount of goods.
Lending is declining, not increasing. Businesses and households are refraining from borrowing, sometimes because credit standards are tightening, sometimes because people have chosen to pay down outstanding debt, and sometimes because they have defaulted.
Incomes are stagnant, as has been noted earlier in this thread. With flat to declining incomes, there is a limited amount of currency available to purchase goods and services, whether consumer or business.
With loan money declining and incomes flat, the prima facie reason for inflation ceases to exist.
But that provokes a larger question: Where did all the stimulus money go?
I’d love to hear someone answer that one.
HighlyTrainedRealEstateAnalyst
billddrummer,
I concur with your opinion of inflation. There are multiple reasons for inflation, but under our system we are referring to a condition where too many dollars are trying to purchase too few goods. This is a result of money being produced not by labor, but by a “printing press”.
I recently saw an article that addressed your question as to where the stimulus went, and I have watched Bernanke’s senate testimony on the subject. From what I can gather (nobody knows for sure because the Fed has never been audited) the two primary places it went were 1) Overseas banks, 2) Large banks in the U.S.
The banks in the U.S. are not currently lending it to citizens, they are sitting on it because they were able to “borrow” it from the Fed at less than 1% and they can invest the money in Treasuries for a profit.
All of that money will soon be used to buy up what’s left of the private sector, starting with small banks. There have been over 100 bank closing this year alone.
Sully
Donna, there is probably no way to come up with an exact date. However, this might be a good early indicator:
The 10 year Treasury Bond is at record low yields, so bond buyers are looking for more economic softness, not inflation.
The first heads up about inflation you will see will be when the Bid to Cover ratio of the Treasury Bonds — how many buyers are there relative to bonds for sale at US auction — right now, its oversubscribed 3X. Once buyers start insisting on greater yield, the Treasury department will have to start raising the bond rates they offer — we will know that Bonds are a short, due to impending inflation.
That will be your early inflation warning.
smarten
Hey Sully, will you give us a heads up when demand for Treasuries wanes and rates start rising?
In my search for a low cost mortgage, I stumbled upon a couple of other indicators which I think provide the same kinds of clues.
The first is pricing on mortgage backed securities [“MBS”]. An interesting site I’ve discovered which monitors this segment of the marketplace is http://www.mortgagenewsdaily.com/consumer_rates/ . Yesterday the pricing on MBS reached an all time ever high [translation: demand exceeds supply pushing up the prices investors will pay].
The second is the FNMA par [purchase] rate on 30 year owner-occupied fixed rate mortgages, which changes daily [thanks to IJJ for turning me on to http://www.efanniemae.com/syndicated/documents/mbs/apeprices/archives/cur30.html ]. The FNMA par rate is the mirror opposite of MBS pricing – as prices paid for MBS increase, long term mortgage interest rates fall. And to prove the point, today the FNMA par rate reached an all time ever low [at least for 10 and 30 day locks, and it came within a hair insofar as 60 and 90 day locks are concerned].