Mortgage rates continued to fall today as the Federal Reserve furthers its action plan to help stimulate demand for homes. Freddie Mac announced that mortgage rates that are hovering around 5.19% this week for a 30 year fixed mortgage haven't been this low since 1979. Today rates were at 5.0%. Earlier this week the Fed cut the federal funds rate to a range of 0 to .25%.
The Big 3 Automakers aren't going to add President Bush to their holiday cards after his comments today. The President noted that the White House is considering an "orderly bankruptcy" instead of a bailout. In a speech at the American Enterprise Institute, the President noted that "Under normal circumstances, no question bankruptcy court is the best way to work through credit and debt and restructuring...These aren't normal circumstances. That's the problem."
As uncertain economic times continue the media is awash with reports about consumers cutting back and beginning to save for the first time in years. While it may initially seem like a common sense approach to an uncertain financial future, like usual the masses might just have this one wrong. Consider these frightening facts:
Stocks are down roughly 50 percent - worldwide. Mutual funds & Hedge funds are expected to follow a similar downward trajectory. The largest American brand-name companies are down 50% to 80%. Small business owners and suppliers are beginning to experience shrinking lines of credit and the loss of major accounts; even farmers are reporting an inability to borrow money for fertilizers and crops.
Middle-class Americans have watched in stunned disbelief as their 401(k) sink by half while the value of their homes drop by an average of 20 to 30 percent...which actually looks great in comparison!
Commodities are no better: gold is down by 20 to 30 percent of its former high while silver has dropped by 40 percent. Investors are losing money in every asset class including cash! Even oil is down by roughly 70 percent and still dropping.
So, where does it all end? Not even the experts know for sure but one thing is certain; saving is one of the last ways to preserve your wealth during this downturn. With Treasury yields approaching negative returns, paper I.O.U's capable of going to zero and rumblings about "quantitative easing" and the devaluation of the dollar saving might still turn out to be one of most risky things you can do with your money.
Most investors are simply stumped when it comes to trying to figure out where to stash their cash as evidenced by the recent stampede to Treasury bonds. Why does real estate remain an unappreciated investment? Most people heard it on the media and lack the ability to crunch the numbers for themselves.
Short sale investors will do well to stick to the fundamentals; tangible assets that provide for food, safety and shelter. Combined with the use of leverage, tangible assets like real estate retain value even while other investments drop to zero. They will automatically adjust to the new rate of value exchange despite whatever "quantitative easy" or dollar devaluation takes place in the future and unlike other commodities, real estate is able to earn a return in the meantime.
The Bureau of Labor Statistics (BLS) released the December Producer Price Index earlier this week which showed a change of negative 2.2 percent over the prior month. The PPI is not something many short sale investors keep track of but as a leading indicator, it can provide useful insight into future trends likely to be taking place in the economy as a whole and the real estate sector itself six to nine months into the future.
As a general rule of thumb, increasing PPI can indicate future increase in the price of consumer goods and services at a later date while reduced or dropping PPI numbers may indicate lower cost goods or services. However, an important distinction should be made; while increasing PPI numbers are almost always followed by increased consumer prices (inflation), lowered numbers do not always reflect lower prices.
This is due in part to the cost of producing goods or supplying services; once profit margins drop below a given point it actually costs more money to make or provides the goods or services than what is brought in lay-offs, discontinuation of product lines and other shortages are likely to take place instead of further reductions. This creates a unique situation for short sale investors; not only have housing starts dropped dramatically in recent months but even a precursory glance at certain sub-sections indicates startling trends:
* Softwood lumber products fell -2.6 percent
* Crude goods dropped -12.5 percent
* General freight and long distance trucking down by -2.7 percent
* Industrial commodities down by -5.4 percent
To summarize:
1. Rising PPI = Inflation Pressures expected to reach consumers in three to six months until prices reach a level the consumer refuses. Meanwhile, excess demand increases competition as new entrants to market compete for profits against early entrants. Long term outcome is stabilization and/or fall in prices as currently taking place in the real estate market. Notice, although real estate is a large industry with its own tracking mechanism, it is in fact, comprised of a multitude of smaller segments which can be tracked.
2. Falling PPI = Reduced consumer prices then either increased consumer prices or shortages as production falls below consumption levels due to decreased profitability of supplying goods and services. The long term outcome is a rise in prices as demand outpaces supply and/or production. Many economic analysts expect the long term outlook for tangible assets and commodities to eventually rise as the price and production of raw materials fall.
Charles Gardner
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