The Problems are the Path: Goldilocks Recession and the FED

You all know the story about Goldilocks and the Three Bears...Don't You??  Let me summarize it here.  Three Bears: Papa Bear, Mama Bear and Baby Bear lived in the Woods.  Mama Bear made porridge.  Poured in Papa Bear's Big Bowl, Baby Bear's mid sized bowl and Mama Bear's small.  It was Too Hot.  They went for a walk and here comes Goldilocks skipping through the forest.  She sees the open door to the the Bear's house and walks in.  She was hungry and the porridge smelled so good.  Papa Bear's was too Hot, Mama Bear's was too cold....BUT Baby Bears was just right.  

So we are in the Goldilocks' economy.  The last US Government report had July with a 2.8% GDP growth rate and a 2.5% inflation rate.  The stock market was hitting new highs and property prices kept moving higher with little inventory.  Mortgage rates were above 7% with affordability still big question.  The FED's measurement of inflation still had two areas that need to come in.  The Stock Market with former Greenspan's comment if "Irrational Exuberance" and housing.  Once those two number started to come in the inflation rate of 2% would be viable.

Prior letters from me had pointed out that we were already in a recession.  It was only a matter of time before the stock market and housing market realized it and the result would be a bite...a BIG BITE!  It appears we have finally had that BIG BITE.  The stock market has dropped three days in a row.  The NASDAQ has gone into correction territory.  Housing has finally had the realization with Stockton being the Top Foreclosure Town in the US.

The Financial gurus are calling for 3 rate cuts again for this year as the call was at the same time for last year. The call last year never happened.  Never happened as the CME futures market had forecast it as happening at over 90% probability.  The futures were calling for a 1/2 point cut.  SO TOO are the forecasts for this year.  Media power appears to be the thing as the forces that are behind the Media, commonly referred to as Wall Street, have big bets on the direction of interest rates.  Three rates cuts for this year and 1/2 cut and aggressive cutting to bring rates down to 3-4%.

BUT WHY?  For speculation profits?  The FED is supposed to be beaten into submission by financial gain for a few?

Several weeks ago Chairman Powell stated the FED would maintain its independence.  Many thought this was a response to Donald Trump....I think not...CME Futures did not hear it!

There are some political ramifications on an interest cut.  Cut before the Election would benefit the party in power looking for re-election to dominate Congress and the Presidency.  A cut after the election would benefit the opposing party.  No cut, the opposing party would have the power to be beaten on inflation, job loss, housing affordability.  (Leave personalities out of the equation)

If the FED were considering a rate cut by politics the Democrats want to raise taxes and continue deficit spending the Republican was the cut taxes spur the economy and take government out of regulation.  The Democrat policy would bring back inflation and Republicans?  The argument is the expansion of the economy and Drill Baby Drill with government out of regulation would cut the Total US Debt.  Well all arguments so my call is the FED lets the People decide and stays out of politics until there is a real sign of a Recession.  The recent decline in the stock market is not a panic...my bet it rallies back and all forget about the recent sell off!

The change in Job Growth coming in at 144,000. slightly less than forecasted, and unemployment ratio increasing is not really a recession sign.  The summer had a increase in new people to the job seekers....GRADUATION!

August will be the Dog Days and the Bull or Bear Market will turn into the Buffalo Market....Wild and Wooly!

Mortgage rates have dramatically come down below 7%, housing inventory has increased and Days on the Market in the Bay Area are now over 30 days.  Opportunity is knocking.  New listing are now seeing price cuts and no over bids and increasing prices. The commercial market of the initial layer of income properties are seeing the stand off between sellers at 5-6% Cap Rates and 7%+ in Cap Rates for buyers folding in toward the buyer.  All it took is a 1000 point decline on the Dow Jones to bring "I's a Believer" to the sellers!

I doubt if the 1000 point decline had anything to do with it; other than, a little nudge.  The debt and refinancing behind much of commercial paper has a maturity that is facing a decision to add to the equity in order to refinance or sell and move on.  Either Big properties or little Properties or medium properties are seeing reality of making a decision.  JUST LIKE THE THREE BEARS.  That is were the opportunity will lie for commercial investors and residential buyers alike.  From a demand side the medium ..Baby Bear..size of the market is the most in demand.  Affordability is the reason.

This affordability is not going to end quickly or kindly.  Fannie Mae and Freddie Mac are tightening their lending rules.  Too much fraud potential is the reason.  Tighter rules means qualification tighter and approval rates will decline.   The only resolution is home prices must decline to match rules and interest rates and of course affordability payments.  Just like the stock market too much money will impact over priced properties.  From my evaluation a home in Tracy is selling for one half of Redwood City.  A estate in El Dorado Hills and Loomis it is one tenth to one quarter of a similar property in Atherton.  

Good luck in your real estate ventures!

As before, call or write for any question you may have and think of me of your "in the know real estate professional".