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Fall Colors Bring a Chill of Inflation

Fall colors are in full swing and the chill of inflation is just starting to be seen in early reports. While we don’t feel inflation will roar until unemployment has peaked and a hot economy starts to pay more and hire more, it will start to make its presence known in the coming months. This week we saw it in the CPI numbers coming in a little higher than expected and a little higher than the prior month, too. Only a tenth higher and that wouldn’t be as concerning except for the fact that the CPI measure includes all the cash for clunker rebates as if they were price decreases. Certainly we would have seen an even-hotter CPI increase if the pre-rebate price had been used. Another small indicator was the NY State Manufacturing index coming in at 34.57, not high on its own but when compared to expectations of 17.25 it was noticed.

Remember that two things drive long-term real estate interest rates: INFLATION and SUPPLY AND DEMAND. On the scorecard, mark inflation as a tiny rattle of the sabers this week. Supply and Demand remains in our favor, BUT we like Belshazzar are reading the writing on the wall and it too isn’t pretty for the near future. The Fed purchases of MBS will taper off but continue through about 3/31/10. Over the past many months they have purchased at about a $25B/wk run rate. This week was $16B and on average it would be near $14B to hit $1.25T in March. You can mark your scorecard here as Writing-on-the-wall, still helping but it won’t be there for long.

One further indicator we use measure the two keys mentioned is the words of the Fed. And this morning, even as we write, Fed Chairman Ben Bernanke is speaking in San Francisco. Watch for news on this tonight and in the a.m. to see if he gives any further hints on their exit strategy from the current near-zero interest rate policy, weak-dollar actions and inflation watch. Another powerful voice is FDIC Chairman Sheila Bair. She testified before the Senate Banking Committee this past week that the biggest pressure that will bear on insured lenders in the near term will be troubled commercial real estate (CRE) loans. She recommended modifications and workouts as the way to head off this trouble at the pass. Watch for more news on CRE workouts.

On the Legislative front, Homebuyer Tax Credit extension bills are multiplying and sitting. The Military Extension that passed the house waits in the Senate Finance Committee for discussion and eventually a floor vote. The other extension bills are in two camps, the “As-is until June 1, 2010” camp and the “Take-it-to-the-Limit, $15k, All-Buyers, January 1, 2011” camp. The latter sounds like the NAR drafted the bill. In fact, the chief proponent of that approach, Senator Johnny Isakson, R-GA, spoke up this past week. He wants the “All-in” approach but is willing to extend it just to June 30. Read his entire comments by clicking here, or read a taste of it: “So I would submit that when we look at the sunset date of November 30 on the first-time home buyer tax credit, we should extend it--not forever but through midyear next year, to the end of June 2010. There is a reason for that recommendation. The worst 3 months of the year in any housing market anywhere in the United States are December, January, and February because it is winter and because it is the holidays.” Right now bills for both camps are in the Senate Finance and the House Ways & Means committees. The working proposal for paying for either camp is now to ratchet back some of the discretionary ARRA stimulus act spending, and reallocate it. We’ll keep our eye on progress there and let you know.

Through all of this, rates remain fantastic. Is there anyone you know who would benefit from receiving this kind of timely information? Please hit the reply button and let me know – I’ll be happy to help them make informed decisions in this important time. Or give me a call anytime at 541 318 0888. I look forward to helping you, your clients, family and friends get the best professional advice and service available. Make it a great week!

Catching up on the recent blog posts this one is from 10/19 - if you would like to receive these real time, send me an email: dave@signetmortgage.com.

Posted Thursday Oct 29