[Periodically, we’ll start providing a salient comment summaries by Matrix readers ’cause they have a lot to say -ed]
Common Sense: Inflation is rising rapidly because the CPI bases its housing cost component on rents, which are also rising rapidly. With sales prices leveling off, if the CPI used those prices as a surrogate for the cost of owner occupied housing, inflation would seem lower and there would be no need to raise rates.
HOWEVER during the bubble, as people exited rental units for owner occupied housing, rents were depressed, and that kept the CPI down. Yet if you did not own a home and wanted one, your cost of living soared — due in part to the effect of cheap credit –and the CPI did not reflect this.
If the FEDs stop now, it would in effect have ended up using whatever measure of housing price inflation would make the CPI seem lower, and would have ignored housing price inflation on the upside and reacted to it on the downside — a Bernanke put. The result will be inflation and (yet another) transfer from younger generations to older onces.
Housing price affordability relative to income is going to have to be restored, folks. There aren’t enough very affluent people willing to live as if they were poor for 40 years paying off 40 year mortgages to support the current prices. We’ll either have to have inflation, allowing at least some people’s income to catch up with today’s prices, or price cuts, or both.
BTW, if the FEDs cut interest rates to support housing, foreigners could stop buying U.S. bonds, the dollar could tank, and rates could soar anyway.
Candor: As a developer, I’ve certainly benefitted from the generous amount of money in the marketplace seeking out a real estate investment. I had not considered the increase in mortgage brokers as a source for looser underwriting standards, however. Certainly here in DC, mortgage brokers are still looking to fill desks and keep placing loans, but I think the FOMC is right: it is the astonishing amount of money that is now in the industry is leading to looser underwriting standards. Blackstone just closed a huge portfolio, and many, many other companies are finding similar success. Unfortunately, there just are not that many good projects out there that provide the returns these companies are seeking. That means either return the money, look much, much harder for properties, or ‘tinker’ with the revenue projections. About five years ago, Sam Zell spoke at the NYU REIT conference about the maturation of real estate into ‘yet another investment asset’ and the unimaginable amount of money that would bring. He felt it would continue to be hard to place the money, but that those owners who ran their properties like more traditional investments (ie no reciepts in a shoebox) would reap the benefits.
Insight: Wait, isn’t the most important statistic the one that says the number of condo sales were down 15%, compared to second quarter, 2005?
Or, was that decrease in condo sales offset by an increase in co-op sales?
I don’t see much in any of these reports about actual number of sales, only about average price of properties and inventory levels.
Compassion: I think a lot of people are OK financially. BUT, job uncertainty seems higher. It is pretty easy to find some one who is just as skilled and talented and doing worse (and better). I think the anxiety comes from a recognition of how easy it is to fall off of the ladder and how badly it would hurt.
Tags: Ben Bernanke