A: It's been a little while since I talked about the economy, inflation and monetary policy here on UrbanDigs. For a little while I was starting to think the fed actually got it perfectly right, slowing down the economy enough to ease inflation pressures, but not enough to cause an outright recession. Couple that with a correction in oil prices and the 4 month stock market rally is explained. But with today's PPI # and housing permits released, reality is starting to settle in. We are NOT out of the inflation woods yet!
A little over a year ago I wrote a post here on UrbanDigs about a fundamental shift of investing from housing to stocks. It was before I sold my apartment and was still struggling to make do with my enormous living costs. As much as I would have liked to just flip a switch and cash out my housing profit to put into stocks, things just don't work that way!
In the post titled, 'Will Growth Shift From Housing To Stocks', that I wrote back in November of 2005, I made a few statements as to why I thought the stock market was ripe for big gains in the coming year or two. If only I had the cash to follow my own advice!
I quickly learned the illiquid nature of housing as I listed my apartment for sale in January, took 5 months to find a buyer, and closed in early July with an all cash deal expedited by no financing. However, in that time the stock market already started to run and I stayed on the sidelines. A poor decision.
But you must move on! Buying into the stock market right now seems a bit risky to me after the 6-8% gains that were enjoyed in the past 6 months or so. As a contrarian investor, I like to sell high and buy low, even if that means holding onto no gains for a while if I don't time the investment perfectly. Who does. Looking forward, I am perfectly fine with my money getting 5.05% in a no-risk online savings account as I await future economic data to come in.
Today's economic data is a dose of reality! Inflation is not dead yet as the stock markets would have you believe with its unsustainable rally of recent months. According to CNN Money:
The Labor Department's Producer Price Index jumped a larger-than-expected 2 percent in November. The measure of prices paid by businesses posted their biggest gain since 1974. Core PPI , which strips out volatile food and gasoline prices , rose 1.3 percent, spurring inflation worries
A similar article in
Yahoo Finance takes this data a bit deeper:
The Producer Price Index, which measures inflation pressures before they reach the consumer, was up 2 percent last month, the biggest advance since a similar increase in November 1974, the Labor Department reported Tuesday.
Economists had been expecting a rebound in wholesale prices following two months of big declines. However, the 2 percent jump was four times bigger than the 0.5 percent increase they had forecast. Even excluding volatile energy and food prices, core inflation posted a 1.3 percent advance, the biggest jump in 26 years.
You see, the PPI # tells us about inflation at the production level, which if present, will eventually trickle down to the consumer via higher prices for goods. So, this is sort of a forward looking # which should be interpreted as a warning sign for the months to come. The
Yahoo Finance article continues:
The 2 percent rise in wholesale inflation followed four straight months of benign readings including outright big declines of 1.3 percent in September and 1.6 percent in October.
In those months, energy prices were falling sharply, a situation that reversed in November.
Food costs showed a small 0.1 percent rise last month after a big 0.8 percent decline in October as increases in the price of dairy products, eggs and soft drinks offset declines in vegetable and fruit prices.
So, we must be vigilint about this stuff. Its a lot to digest, I know, but if inflation peaks its ugly head again, then the fed will be forced into raising interest rates further in 2007 (not cutting), which would lead to a continuation of the housing correction going into 2008 or further.
The thing about housing is its illiquid nature. Once housing turns from a booming market to a slowing one, it doesn't just get one peice of good news and turn back around to good times. It takes time to work through inventory buildups. It takes time to get back to a interest rate environment where 30YR mortgages are below 5%. It takes time to get the all important 'time on market' indicator back down to where it was a few years ago. These things TAKE TIME to work out!
The housing boom lasted a good 4 years or so if you start the boom after 9/11 and end the boom in mid 2005. Others will argue that the housing boom started way earlier with 9/11 just a short term blip in the run. I'll buy that as I was priced out of the housing market for years before 9/11 showed a few opportunities. So whether the boom was 4 years or 7 years, it really doesn't matter. The point is it lasted a good period of time. With the peak in housing occurring around mid 2005 (in hindsight), we are now about 18 months into a slowdown. What if the slowdown lasts 4 years? What if it lasts 7 years? Only time will tell and we must follow all the signs that will forecast a brighter future for housing down the road. These include lower interest rates making housing more affordable, less time on market indicating strength in the buyer pool, lower inventory keeping supply lower than demand, and a strong economy generating enough income for people to buy new homes.
I'll leave it to you to decide when to re-enter. As for monetary policy, here is what I think the fed will do.
NEXT MEETING: No Change. Inflation remains a concern.
WHAT WILL MAKE THE FED CUT IN MID 2007: Easing inflation #'s and a continued softening of the housing market will make the fed cut rates in 2007.
WHAT WILL MAKE THE FED RAISE IN MID 2007: More economic data like today's PPI #. If energy continues to rise above the $70/Barrel mark again. A strengthening housing market and a continued rally in equities will tell the fed the economy is very strong and might need to be slowed.
I think 2007 will be flat to down for housing as we iron out the fundamental bumps of inventory and weak speculators. Those who bought between 2003-2005 with short term interest only loans will have some problems and might be forced to sell. Stocks will have another up year, but not as good as 2006. Inflation's true face will either show or go away in 2007. I will certainly be keeping my eyes on inflation and energy prices as I think these 2 guys will be the best indicators of future monetary policy, equity direction, and housing's level of correction.
A: Today is the much-anticipated Real Estate Yankee Blog Swap. Bloggers from all across the country agreed to switch places for a day. My opponent today is Kris Berg of San Diego Home Blog. Kris and her husband Steve are brokers in beautiful San Diego and the publishers of a very educational real estate blog that is a worthy read on the other side of the country! The points that are discussed on their blog can go a long way towards further educating your real estate investing style and it always helps to get a different perspective from the craziness of NYC real estate once in a while. As for this first Yankee Blog Swap, we all owe a big shout-out to Mary at RSS Pieces for organizing this circus!
Today I have the challenge or, shall we say, honor of channeling Noah. We are participating in the Real Estate Yankee Blog Swap. I don't have the foggiest notion where the "Yankee" came in, but I have to assume this reference alone gives Yankee Noah the edge. Our blogs and personalities could not be more different. It is a classic case of East meets West; I am San Diego based, and Noah, of course, is doing time in the Big Apple. My style tends to be a little more laid back (what else would you expect from a California girl?), and I generally work the 'burbs; Noah is Big-City-Stats-Man.
Clearly, I know as much about New York City Real Estate as Michael Richards knows about detante (sorry, French people - I don't know how to put the little thing over the "e"), so saying this a challenge for me is the understatement of the year. Further, the "rules" include "writing a blog that fits the corporate culture of the blog you are paired with." I guess this means I should know what the "A:" with which Noah begins most entries here stands for. Sure, I could have asked, but it is more fun to speculate. Is it the "Answer" in the Jeopardy fashion, with the question following? Does it stand for "Analysis", like these sentences are the Cliff Notes to what follows? Is "A" the first initial of the name of his ghost writer? Beats me. So, on with the swap. It is quite possible that in one simple blog exchange, I could nuke every ounce of readership that Noah has worked so hard to capture in the past two years. My attorneys are standing by.
A: I have been to New York once in my life, if you exclude a couple of airport layovers. I hurled the entire time. Helmsley Palace has lovely accommodations, but a San Diegan's idea of "dressing for dinner" involves wearing the "good jeans". Getting a cab is a contact sport; riding in one is certain premature death. In San Diego, we own cars and drive them ourselves. Garages come with our homes and are not purchased separately. An apartment in California is a rental unit, and we do not have coops.
Put down that Letter to the Editor! New York did not make me sick, in the strictest sense. It is just that the sights and smells of the streets of Manhattan are no match for a woman in her first trimester. New York, was however, responsible for my swearing off knishes for the next year or so.
Sidewalk Knishes
Asking price: Approximately $3.50
Size: Approximately 3 inches, if memory serves me.
PPSF: Nothing compared to the price I paid later.
Thirteen Block Cab Ride
Asking price: Equivalent to one San Diego mortgage payment.
Size: Not sure. I never got one.
PPSF: See "size".
Dinner at Helmsley Palace
Asking price: No idea. They wouldn't let us in in our jeans.
Size: From our vantage point of noses-pressed-against-the-window, it looked rather intimate.
PPSF: Priceless.
We dutifully followed the concierge's advice and dined at the Stage Coach Deli, where he no doubt perceived that our western blue-jean wearing selves would go largely undetected, or would at least be tolerated. I, for one, did not want to be responsible for irreversibly destroying the upscale image of the City That Never Sleeps.
Stage Coach Deli Sandwich
Asking price: $4 million
Size: 12 meters
PPSF: No idea. I don't do metric.
We were lucky enough to visit the lobby of Donald Trump's "building", Trump Plaza. It had shiny floors and looked very expensive. The real estate nomenclature of New York remains largely a mystery to me; you guys talk funny. We speak of houses and you, at least in Manhattan, don't speak of houses at all. You speak of buildings, we speak of complexes. Your apartments are our condominums, our apartments are your rentals, and your coops are, well, your coops. Sometimes, just to confuse us, you use the words building, apartment and coop to describe a single "home".
Trump Plaza building 27E coop apartment
Asking price: $875,000 - Marketed by Carol Friedman of Nest Seekers
Size: 1400 SFT
PPSF: $675 (Keep in mind, this is a lease and not real property).
Floors: Very shiny.
Scripps Ranch San Diego condominium
Asking price: $430,000 - Marketed by Kris Berg of Prudential CA Realty
Size: 1387 SFT (including, gasp, a garage!)
PPSF: $310 (You own it!)
Floors: Not shiny.
I want to thank Noah for allowing me to hijack his blog today. Some day, I hope to visit your fine city again. I will remember to pack my fancy clothes, and the knishes will be on me!
A BIG thank you to Kris Berg for agreeing to partner with me and write this post for UrbanDigs! Here are the other blog participants:
Transparent Real Estate’s Pat Kitano vs. Zillow’s Drew Meyers
