Inflation Deflation and Real Estate

by THE WAV GROUP on June 21, 2009

Today, the Federal Funds Rate is at 0%.  This has created a surplus of Bank Reserves to fight the financial crisis.  We are also seeing deflation in the Consumer Price Index.  In parlance, the cost of living has gone down.  But deflation today, combined with a mounting Federal Deficit should lead to inflation tomorrow.  This shift should create a stimulus for real estate.

In the absence of the mortgage industry and employment melt down, lower interest rates and a dip in housing prices would naturally lead to a real estate buying party.  Sadly there has not been such fanfare, and many brokerages in our industry are feeling the pinch.

Banks have plenty of cash on hand at an affordable lending rate (virtually free capital) but they are not putting it into circulation.  Strangely, having a large cash balance sheet is typically a negative factor for banks.  For their stock to perform, they need to turn those reserves into interest bering loans that yield them profit – expanding the credit and money supply.  This has not transpired.

A good news shift may be on the horizon for real estate.

At the Luxury Real Estate conference in Las Vegas this year we heard from many brokers representing the secondary home market.  Customers with perfect credit ratings, ample income, plentiful cash reserves, and 50% down payments could not get access to mortgages.  As many of you know, people who own a home over $1 Million USD will typically own 3.2 houses.  These additional homes are either income producing or vacation homes.  This entire marketplace has stalled.

For some strange and unknown reason, the Federal Government has focused the real estate stimulus on first time home buyers and support for mortgage defaults – the segment of the market that is at greatest risk to repay a loan.  In doing so, they have sacrificed access to capital for the rest of the market(including the rich).  So, here is the good news.

Confidence is gaining in the market place and the banks are not fearing a run on cash withdraws by depositors.  Furthermore, toxic assets (loan values higher than actual cash values) are being worked out of the market in an organized way.  If banks begin lending again with the reserves on hand, the real estate market will heat up.  Furthermore, strength in the residential resale market will reduce losses in REO properties – creating a win-win.  The perfect trifecta would be jobs growth.

The economic factors are in place to create a late summer or early fall bounce in real estate.  Lets hope it happens.

 

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