The Sins of the Past – And the Death of Real Estate

When I first began this blog ten months or so ago I began writing about the irresponsible action that the federal reserve was taking to prop up the American stock markets.

 

My point was that in the past, when the fed acted to impact the economy in one way or another they had always targeted some economic metric like inflation or interest rates, and their actions were not targeted to impact any one group over another, but were instead intended to have a pretty direct but also broad-reaching impact on the overall economy and thus benefit everyone.

 

What was unusual about their actions last fall was that when they started to act to prop up an over-bought stock market, they began to act in the best interests of a small subset of American citizens – those with brokerage and retirement accounts.

 

What’s more, as I argued at that time, their actions were actually detrimental to the rest of the population because it would cause a rampant increase in inflation, and among other things, a severely devalued currency.

 

But they decided to take a populist approach and act anyway, and ignore the fact that there so many other variables impacting the stock market that there was no way that they could be sure that their actions would work, while at the same time knowing that the downside risk was almost guaranteed.

 

So here we are 10 months later. The federal reserve has dumped hundreds of billions of dollars into the economy. To what end? 

• When they started to act the DOW was just over 14,000. As I write this it’s just over 12000.
•  At that time the dollar was worth 0.75 Euro. As I write this it’s down to 0.64.
•  The US Dollar is now at risk of being replaced as the international currency of trade.
• Inflation is up sharply – oil and food prices have doubled (although part of these price increase are due to our devalued currency).
• Real estate markets nationally are still a disaster.

All for naught. Their actions have failed. Miserably.

 

Unfortunately this isn’t the end of the story. No. There is a price to pay for the fed’s irresponsible behavior last fall.

 

And we’re starting to see the impact right now.

 

Interest rates are going up. And they’re going to go up fast. They’re already up to their highest point in the last five months, and the brilliant fed chairman, after all of the emergency rate cuts over the last 10 months, now says OOOOPS!. Inflation is back so we’re going to have to raise interest rates further – and FAST.

 

And this will mean the death of real estate.

 

We had an uptick in existing home sales in April, a large part of which was driven by the extremely low interest rates that resulted from all of the rate cuts. But the party is already over. I’ve been chasing an exceptionally clean and profitable commercial real estate deal since April, and every time I turn around the interest rate has gone up.

 

Significantly.

 

When I started the financing process I was looking at a rate of about 6.2%. Last Friday it had jumped to 7.4%, which put us back at the negotiating table and may yet kill the deal. And my mortgage broker says they’re still trending higher.

 

These real estate markets can’t bear another burden like this.

 

For the last year I have been bullish on a relatively short 3-4 year time horizon for the return of the first time homebuyer market. If the fed ratchets rates back up it will be anyone’s guess as to how long it might really take.