Where is it going to come from?

Posted: Jan 08, 2007 10:49 AM

This is a push on my part to get the consumer (you and I) to realize that help is on the way from the Federal Reserve and the real estate industry. The Federal Reserve must and will be starting to lower interest rates, and this will get the real estate market to begin to reverse its slumping sales and eventually create higher prices. I know there are people who will read no further and start disagreeing with me at this point, but if they choose to go on and read the article, I believe I will change their minds. If not, I simply say "that's what horse racing is all about!"

For years, further back than I care to remember, people have always touted stocks to me.

They will always tell me that they heard it from a friend, who heard it from someone else, whose brother-in-law is well connected that XYZ Company was going to double their earnings, and the stock was going to go through the roof. So I would get a Standard and Poor sheet on the Company and look at the Income Statement and realize that the cash flow of the Company was insufficient to create the amount of earnings that was being claimed. I was generally right about the earnings, but because the stock market moves on many things, earnings just being one, I wasn't always right about the stock.

Now lets look at the reality of the economy today. Turn on any station that deals with the stock market, and you will always hear that the main cause of inflation is increasing wages. You will also hear that we have a consumer driven economy. Wages aren't increasing by anyone's measure so where is the money coming from for consumers to drive the economy? We know that the middle class consumer, the largest class of people in our Country, is struggling to keep above water and that the upper class doesn't have the numbers to single handily keep the economy moving. That leaves only one place to get the money: borrowing. There are really only two places to borrow: from yourself through your house or through institutions which in reality end up being credit cards.

The real estate industry is stagnant at this time except in upper end houses. Again, these are not middle class houses but upper class houses. While borrowing occurs in upper class houses, it doesn't come close to the amount taken out of the middle and lower class houses.

Many people write me and tell me they do not wish to risk their houses and thus borrow from credit cards which are unsecured debt. That way, if anything happens, they can at best hurt their credit for a while if they are unable to meet their obligations and at worse case file bankruptcy and wipe out the cards. I am not an attorney, but I can tell you that while the aforementioned scenario used to be a realistic solution, that is no longer the case; we have a new bankruptcy law on the books that generally keeps you from being able to wipe out the credit cards. (Note: This is my understanding and not necessarily the law as it might pertain to your situation. Please check with your attorney or a bankruptcy attorney before making any decisions. They are the ones to explain the law to you.)

Let's get back to your house. The equity, value less the debt on the house, is yours whether it is considered "funny money" or not. Many people, generally those who do not own houses, tend to scoff at the notion that one can increase his equity position because of appreciation, and therefore make statements that the money available is only temporary and is already beginning to disappear. The history of real estate in the United States doesn't ratify those statements but rather contradicts them. Real estate has continually gone up and most likely will as long as we are the place where most of the rest of the world wants to live. There are places where industry has abandoned the city and the jobs have left with it, and in those places, the short term outlook for real estate isn't great. However, these places are far over shadowed by the majority of great places where the biggest population in the Country lives: California, New York, Florida, Texas, etc.

The Federal Reserve certainly understands the importance of housing and housing's collateral benefits: home furnishings, landscaping and remodeling which creates numerous jobs and adds considerably to the Nations GDP. They know that a recession is just as big a black mark against them as run away inflation. Their job, although a self-appointed one, is to keep the nation moving between the two evils: inflation and recession. Their charter really only gives them the right to regulate the short term interest rates, Fed Funds rate and the Re-discount rate, and to buy and sell bonds to the Nations banks to regulate the money supply. From this, they interpolated the management of the business cycle and generally have done a pretty good job with it.

Getting back to the point of the article which is where the money is going to come from to keep the economy growing, it is pretty obvious it must come from the monies consumers have taken from the housing industry. I do not see industry's wages as a panacea as I don't expect to see any greater wage growth than currently exists. I also believe people are getting to the end of their short term borrowing from credit cards so by default we are left with real estate. Real estate must be healthy, or we are going to head toward a recession. The answer is to have the Federal Reserve start lowering their rates, and the rest of the rates will fall in line.

As of this writing, there is an 80% chance of that happening, based on the Treasury futures, in June of this year. I look for that to move up to at least April with mortgage rates continue to improve from where we are currently: low 6% and down in both jumbo and conforming rates. Obviously, the world's economy plays a part in the big picture, and there are many factors that will influence our economy including, free trade, wars and hostilities, oil, etc. Anything can happen to change the picture, but until I see something ominous on the horizon, I am sticking with my position.

Where is it going to come from? From you--the consumer. Realistically, how you get the money is the only thing we are debating. Who is right and who is wrong isn't the most important thing, but realizing the awesome power the consumer has is the real story.

Be smart, use your power well, and the Nation, you, and I will prosper.