Rising Interest rates and mixed messages
Anybody in the process of buying a home or in the real estate business knows that interest rates just jumped quite significantly. There are some mixed messages on why this took place. Some people who have not been right about too much in the past several years think it’s the beginning of signs of recovery.
Fiscal Responsibility is a Concern After All
Investors in the bond markets, where the Treasury Department goes to raise money to keep the government running, are getting skeptical about the scale of Washington’s spending. The yields on Treasury notes have risen to their highest points in five months as investors who once thronged to the safety of government debt begin to invest elsewhere.
“These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings,” Mr. Bernanke said.
This is an interesting situation taking place and Mr. Bernanke thinks it’s because of greater economic optimism. Unfortunately, it could be a sign that foreign investors are not too keen about the Federal Reserve printing up money to buy this same debt… which the only rational reason why this would take place is if the demand was not there to begin with.
China Warns U.S. About Printing Money 05/24/09
Unless you’ve been completely ignoring who has been the big buyer of all of the U.S. Treasury Bonds for the past year to pay for all of the money being shelled out to bail everybody out… it’s been the Chinese. Uncle Charlie has been pretty generous in the rates for all of that excess money they have. Until now..
(I hope you seriously did not think that the U.S. really had all of that money sitting around.)
With an attempt to keep mortgage rates low, $8,000 first time home buyer tax credits and foreclosure moratoriums for an attempt to help the housing market, the Federal Reserve has actually been printing up money to buy U.S. Treasury Bonds to keep interest rates low. This strategy can only last for so long… When you print money and increase the supply of the currency, it obviously devalues the actual value of that currency. Countries such as Zimbabwe have tried this exact same strategy which eventually made their currency worthless.
http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
These increases appear to reflect concerns about large federal deficits, Mr. Bernanke said.
Much better… and much more honest. (Oh… don’t forget to throw in that we’ve been printing up money to buy our own debt.)
Where We Are in the Economic Cycle
It’s important to understand what happened in the first place under the Bush Administration which eventually led us to the bottom of the Austrian Business Cycle:
The theory views business cycles (which they also call credit cycles) as the inevitable consequence of inherently damaging and ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings.[2]
Combine that with lax lending standards and double the speculative economic bubble that burst… big time.
You get out of it by sacrificing… saving money and getting out of debt.
When I was in college… I think I had every credit card in existence. They just kept sending me those applications and even though I put on there I was a full time college student.. they just kept saying OK and sending me a shiny new plastic card… and then they would raise the credit limits just for making one payment on time.
I had a beautiful girlfriend that loved Las Vegas for all it was worth. Eventually the credit ran out and the girlfriend moved on… I spent the next 4 years just working, not spending anything on non-necessities and paying all of that debt off. It was not that much fun… but eventually ended up being very rewarding.
Today’s Economic Policy under Obama
The attempt to get out of the Austrian Business Cycle bottom is the Keynesian Economic Theory:
Keynes argued that the solution to depression was to stimulate the economy (”inducement to invest”) through some combination of two approaches: a reduction in interest rates and government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.[2]
The key word here is “investment” which by my definition is a return on your money. All of the massive spending programs in place, stimulus bills, bailouts, etc… require a return on the money invested to work. This is where foreign investors such as China are looking at where their money is going towards such as GM bailouts, Performing Arts Centers and bailing out bloated governments such as California. The deficit has gotten so large that foreign investors are starting to look elsewhere.
Would you Lend Money on these Programs if you had better Alternatives?
This is Want I want to Drive
I certainly would not. I see zero chance of any of these bailouts ever even returning my money… much less returning my money with any decent return. Should I lend $50 Billion to GM or $50 Billion to American Made Teslamotors? My money would be on Tesla Motors. Should I lend $50 Billion to bail out California? NO WAY… Not when California is one of the greatest states in the United States and their State Government has run it into the ground. It’s absolutely amazing that was once the 8th largest economy in the world is on the verge of BK.
You can have a great product.. but if you have piss poor management… it’s not going to matter.
Would you rather purchase Gold/Silver or Oil?
Wondering why Gas Prices have been shooting up lately? If you are following Oil, Gold and Silver… you’ve noticed prices have shot up significantly since February. Now you know where the money is going…
Interest rates have gone up because the money is going somewhere else and U.S. Treasury Bonds are not that attractive to purchase and the Federal Reserve has been printing money to make up for all of the money that needs to be raised to pay for everything including low interest rates for housing.
Interest rates have to rise to attract investment money… the problem is that what is guaranteeing the debt is in a major deficit and there are serious questions as to whether it can even be paid back. Think about where the Federal Governement has been spending that borrowed money and seriously question if it will get paid back without printing more money. Once again… would you put $50 Billion into GM or $50 Billion into little known Tesla Motors?
The Effect on Real Estate Values
Las Vegas real estate values were decimated before all of the Government programs. By the time anybody in Washington D.C. thought there was a problem or cared because it was starting to effect them… values had already gone down over 40% in Las Vegas. This was part of the natural effect of the Austrian Business Cycle when home values had skyrocketed due to cheap credit and lax lending standards. Obviously… market surges in home values such as Las Vegas, Arizona, Florida and Southern California were blamed on “speculators” and not the crappy cheap loan programs that were global. When Government money got poured into the market to lower interest rates, loan modification bailouts, etc… values in Las Vegas had already gone down too much to save the market. In actuality, the “bubble markets” were allowed to naturally correct in price from the artificial highs of cheap credit and lax lending standards.
Programs such as the $8,000 tax credit and the low interest rates due to the Federal reserve buying U.S. treasury bonds has created a buying frenzy for real estate in Las Vegas that is so cheap. Other real estate markets in the U.S. continue to decline… even with all of these programs in place.
Look for Interest Rates to Continue to Rise
This is my opinion from tracking other things going on. I predict interest rates will continue to rise due to the need for the U.S. Government needing even more money to pay for all of the “stimulus” programs in place. Look for commodity prices to continue to rise as cash rich countries such as China move their money to investing in necessities such as Grain and Oil which will mean higher prices for you.
Real estate markets struggling and showing signs of decline will continue to decline. Throw in the States that are raising their taxes to meet their deficits and expect prices to fall even more as people that can afford to move.. move to states with no state income tax and cheap real estate such as Nevada and Florida.
By far… my savviest clients with money are from Hawaii and California as they bail out and the money they save in taxes easily pays for their mortgage in Las Vegas. Las Vegas real estate values will remain stable… they will not go up in price in the near future due to the huge amount of foreclosures in the pipeline because of the foreclosure moratorium that was put in place this past winter. However… I don’t think they will fall much farther even with the higher interest rates. I’m suggesting to my clients not to get carried away or emotionally trapped in the bidding wars going on for some select bank owned properties because they would be foolish bidding them up above market value due to the amount of bank owned homes on the way.
Be selective and be patient.
One of my Hawaiian clients just saved over $80,000 waiting from August of 2008 to May of 2009 to buy a comparable property. Certainly worth the patience for a strategy I have in place. I did just advise another client to back off of a home that had over 20 offers on it within days with many of the offers above Market value (in my opinion) so hopefully that works out as well. (Actually.. I know it will because I have a very good sense of the quality of advice the other buyers are getting.)
Yep… just cost me over $10,000 in commissions because the buyer could have payed cash for far higher but I would rather end up with a loyal long time client since I know there are several more on the way.
The Big Left Punch
This is my opinion but I predict some certain markets that have just started showing signs of correcting are about to get hit with a big left blinding punch. The $8,000 first time home buyers tax credit is expiring on 12/01/2009 and interest rates will continue to go up. Real Estate is local but lending was global…. markets that should have sunk in value after 09/11/2001 but were artificially kept up in value will eventually sink.
In my opinion… Las Vegas real estate values will remain stable since the vast majority of buyers I entertain have cash or are very financially solid.
That’s just my opinion
But…. what do I know? I just advised my clients to get out of the Las Vegas Real Estate market in 2005 and just got lucky I suppose….
Paul Francis, CRS
Prudential Americana Group – Realtors®
Las Vegas Real Estate
702.592.3058
However… understanding the foreclosure process will certainly help out in getting rid of the fear/stigma associated with a foreclosure. Homeowners often seem to be under the impression that the big bad lender is going to send people over to kick down the door and throw you and all of your belongings out on the street. They get a notice and they think they have to move out right away.
For areas 101 through 606 on the Las Vegas MLS which includes Henderson, 
