The Problems are the Path: Stagflation
1971 the Dow Average had hit 1000 for the second time, brokers were celebrating. Within 4 years the Dow was down about 60%. Interest rates during the years prior to the 70's were dropped to create employment, and cheap money was dominant. THEN, Oil prices went from $10 a bbl to over $100 a bbl in 10 years. Inflation went to 25%. The administrations of both Republican and Democrat could not solve the problems. WIN, "Whip Inflation Now" was a new phrase by Washington for an illness they created. Interest rates rose dramatically! a 6%+ mortgage went to 15%. Buyers still went on with home purchases. Where else do they put their money when Trust was damaged? (See next paragraph)
The 70's started with the greatest investment for the average individual with a Mortgage Real Estate Investment Trust, REIT, that borrowed short term and lent long term. They all failed. Every investment in the same related strategy fell like dominoes. Following that came the Savings and Loan industry who lent long term home mortgages and were faced with short term deposits well above the existing mortgages in their portfolios. From S&L standpoint they best solution was to go with "junk bonds" Pedaled by a Wall Street firm to make up the loss. They too fell and along with them the rest of the S&L industry as Stagflation created a Recession. Resolution Trust Company was created to solve the ills. Real Estate holdings were sold at severely depressed levels for those who could not afford the new higher rates on their adjustable mortgages.( A Real Estate Boom Started) Soon the Insurance Industry also found that the guaranteed rates on annuities they sold in the past could not match the new annuities that the competition were offering as short term interest rates kept rising. Annuities were swapped to the higher rates. The Insurance Companies who sold them could not handle the liquidations. They too, had purchased assets with yields which could not be liquidated without a loss.
Where did the investors go with stock prices declining, savings and loans in liquidation and many of the lesser know Insurance companies who went with the junk bond craze go?
CD's and money market funds with government securities and REAL ESTATE. Real estate prices rose at alarming rates as individuals felt safer in something they could see and touch, they either moved to a larger home or rented them for a constant return.
Stagflation is on the horizon. The savings of the Pandemic years have given individuals a cushion to last out the difficult times. The cost of living is not difficult if you have a cushion. So, if it costs a little more than before the Pandemic, who have a job. pay a little more for goods and services and be happy to have what had been foregone from 2020 to 2022.
The strongest areas in the peninsula are San Mateo, San Carlos and Redwood City where the median income home is affordable with those willing to pay cash! From what I have read in the various real estate sources available to me and not you, the reader, is +63%. The realtors are using an old ploy of pricing homes below market to get multiple offers and over bids. Parent's are helping their children with loans to make their first home affordable for those who have not accumulated a large nest egg. Believe me there are many large nest eggs in the Peninsula. The hope is when interest rates decline, refinance will pay off the parents help, or regenerate the savings liquidated for the purchase. The bottom line here is Do Not Expect to buy below list because you have cash. There are buyers out there who have more than you!
Work from home has decimated San Francisco. It has become a ghost town. Office buildings are empty and many cannot be sold without a severe discount. Office REITS have replaced the 70's Mortgage REITS!
The growth of the Sacramento area is booming as home prices are affordable, at prices that are a severe fraction of those selling in the hot markets previously mentioned. Communities of Luxury Homes surrounding Sacramento sell at prices that are well below those of Atherton, Woodside and Portola Valley.
Investors seeking reasonable rental properties are buying project homes in Elk Grove and similar projects in the Sacramento area. $600,000 sales for 3/2's with discounts and credits for additional work, 10 year builder warranties and a growing force of renters seeking affordable homes.
I still believe that the present administration and Federal Reserve will not be able to continue to raise rates without another bust on the horizon. The greatest achievement of the Federal Reserve will be the creation of another period of Stagflation!
Latest report on Job Openings below 10,000 and below estimates. Private Payrolls rose BUT below expectations!
Jamie Dimond, of JP MORGAN CHASE, says the damages by SVB will hurt the banking industry for years to come.....TRUST is LOST.
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