Friday, October 2, 2009

Real Estate Prices, Diana Olick, inflation, Richard Daughty, stimulus money

Earlier this week, I summarized the conflicting forces that may affect housing prices:
Long term price trends will depend on whether the FED's next rate hike and the next wave of foreclosures will take effect before the "stimulus" money has a chance to generate inflation.

If the foreclosures and higher interest rates win the race, long term trends will favor lower prices. But if the stimulus money percolates through the economy first, then nothing will stop the price of housing (and everything else) from skyrocketing.

Diana Olick of CNBC believes that the foreclosures and general economic bad news will win the race over the inflationary stimulus money:
There is now an estimate out there that rising foreclosures will add 7 million homes to the for-sale inventory over the next two years. Inventories of new and existing construction have been falling, but that could U-turn this fall, as foreclosures rise, banks let go of the homes that didn't qualify for modifications, and job losses push good quality borrowers into default. Pile that on top of seasonality, and I'd watch for home prices to dip again as we get readings on the fall months
Diana Olick - [CNBC photo]

On the other hand, the federal government and the Federal Reserve are trying to reflate the bubble so as to avoid this outcome. Richard Daughty of the Daily Reckoning has tried to place the stimulus package and related efforts in context:
. . . the Federal Reserve (as expressed in their secret motto "We Are Evil") created, out of thin air, a new US$29 billion in bank credit! Wow!

The interesting part is that the Federal Reserve used that new money - and a lot more - to buy $62 billion of US government debt last week! . . . . . And now here - here! - is Greenspan successor Ben Bernanke’s monetary insanity to create, in One Freaking Week (OFW), $62 billion whereas it took old Greenspan an entire month to come up with $10 billion!

This type of currency expansion cannot exist without disastrous consequences for prices in general. [Daughty's column appeared in April, but it reflects the worst trends in monetary policy for the past year.]

If the stimulus package has its predicted effect and results in disastrous inflation, all prices, including those of housing, will rise. But the price of housing in real terms relative to other products may still fall due to the inventory and foreclosure concerns voiced by Olick. If you rely on real estate values to keep up with inflation, you may find yourself falling behind quickly.

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