Gasoline prices spiking again?

Click here for previous analysis of how inflation may affect the housing market.

Click here for an explanation of how one can monitor fuel (and other commodity) prices to get an indication of the direction of inflation and the health of the economy.

On May 7th, 2012, I wrote (quoting CNBC) that fuel prices were in "free fall." Since that post, gasoline prices have fallen roughly 75 cents a gallon in Central Pennsylvania. But today gasoline prices appear to be spiking again, with a 12 or 13 cent a gallon jump appearing at certain stations overnight.  If the "free fall" has stopped, and if prices return to $4.00 (or more) per gallon, the effect on the economy and the real estate market will be even more devastating than the impact we have seen thus far.

Fuel prices in "free fall."

CNBC reported Friday that oil prices were in "free fall." (Observers will note that gasoline prices at the pump are falling also.) While the article cited many factors, the main reason for the decline is the economy:

But the big driver is the concern that the U.S. economy is not strong enough to withstand a weak European economy and slower growth in China. The disappointing April jobs report Friday, showing just 115,000 nonfarm payrolls were added, was the latest catalyst for a second day of heavy selling.

The federal government has printed (or "quantitatively eased" or whatever they are calling it now) trillions of dollars in the last several years. Fuel prices have more than doubled since January 2009. The printing press has not stopped, yet prices are now falling. For the price of a basic commodity to fall while the printing press runs amok is an extraordinary circumstance. At a certain point, even a runaway printing press cannot make people spend money. We should remember this lesson when we consider the effect of lower mortgage rates or new federal subsidies on the real estate market.

Record gasoline prices

Associated Press reports that gasoline prices "have never been higher this time of the year." Even though rising gasoline prices are obvious to everyone who cares to notice, this news is particularly disturbing to those who are counting on a recovery in the real estate market. Do not expect a recovery in real estate while the economy is crippled by record gasoline prices (unless you are thinking about an increasing number of tenants due to continually rising foreclosures).

Inflation surges in September

From CNBC comes bad news on the inflation front:

U.S. producer prices rose more than expected in September to record their largest increase in five months as gasoline prices surged, a government report showed on Tuesday.

August inflation report

Inflation rose throughout the U.S. in August. The AP report included rent plus items recently excluded from the CPI, including food and fuel.

Click here for a discussion of the effect of continued inflation on real estate sales and prices. Regardless of the effect on real estate prices, it is not subject to reasonable dispute that continued inflation will contribute to metal theft - not only from private housing and commercial structures, but also from public facilities and utility infrastructure.

Federal and state governments attempt to treat symptoms of inflation

Various states and the federal government are considering measures to make it more difficult to sell stolen copper. These measures are being considered in response to the upsurge in stolen copper and other metals in recent years:

When thieves ransacked eight air conditioners in an apartment complex in the city of Mobile, Alabama, the culprits made off with $800 worth of scrap metal and left residents with $38,000 worth of damages. "We've had copper robberies since forever," said Officer Christopher Levy of the Mobile Police Department, "but we've seen a spike so far this summer." Record copper prices have caused a surge in U.S. copper thefts, plaguing law enforcement and local governments and prompting states to pass new laws. "Since the beginning of the 2004 spike in copper prices, copper theft and copper prices have been directly linked," a 2010 U.S. Department of Energy study on copper wire thefts said.

These laws will not address the real problem, as metal prices will continue to rise as long as the currency is being devalued. The Reuters article attempts to explain the rise with reference to increased Chinese usage, but that explanation tells only part of the story. Copper is not the only metal that is being stolen in larger amounts. Other commodities have seen rising prices for several years, including fuel, gold and silver. The new laws will only treat the symptoms. If the government truly wants to stop the brazen metal thefts that now plague homes and businesses, the government must stop reckless deficit spending.

In related news, California scrap metal thieves have stolen the irrigation system from a vineyard, threatening the entire grape crop.




For other examples of rampant metal theft in recent months, click here.

Metal and copper thefts get more brazen in Pennsylvania and elsewhere; Cranberry Township; SEPTA car thefts;

I have written previously about rising metal theft as an indicator of continued inflation and its impact on real estate prices.

Recent news reports indicate that metal theft not only continues unabated in Pennsylvania and elsewhere, but that it has become more brazen and is being done at great risk to the thieves:

• In Cranberry Township (near Pittsburgh) thousands of residents remain without power because thieves (at great physical risk) stole "all the copper groundwire" at a substation on Route 19.


• SEPTA riders in Chester, Montgomery and Delaware Counties have been victimized by thefts of catalytic converters while their cars were parked in SEPTA lots during the day.


• Thieves near San Francisco knocked down 300 utility poles in order to steal copper wire and also stole an entire transformer - at great risk to themselves.


• In Sacramento, thieves have stolen a large number of brass components of fire suppression systems from commercial businesses.


• Pipe thieves near Detroit have caused possibly four house explosions by stealing the natural gas pipes from residential dwellings.


• Numerous churches near Miami have lost the use of their air conditioning when copper thieves stole copper tubing and wiring from a/c units.


• In early June, thieves caused a CSX train to de-rail in Massachusetts by stealing steel rails from the railroad line.
  

These cases are not simply an indication of rising crime due to the economic downturn. Metal theft is a specific type of crime that exists solely because inflation has pushed commodity prices higher. Metal theft goes hand-in-hand with an increase in legitimate scrap dealers, companies that offer to buy your gold on late night infomercials, rising gasoline and food prices and other commodity based activity.

Remember, commodity prices affect the economy as a whole. The real estate crash of 2006-2008 was accompanied by a major commodity price increase.

The market for commodities is robust, as the smart money flees the dollar (or defies physical and legal danger) in favor of hard assets. The desperation with which thieves now target metal provides specific evidence that inflation is out of control. All real estate investment decisions must accept this reality.

Metal theft points to direction of inflation and economy

As inflation picks up, the value of scrap metal rises. These price increases affect real estate in two ways:

1. Increasing commodity prices can help predict the general direction of prices of all goods, inclusing real estate; and


2. Increasing scrap metal values place real estate at risk for theft and vandalism.

In particular, metal theft demonstrates the declining value of the dollar and the lengths to which thieves will go to obtain something with real value. Metal theft has been rising in recent years, and in particular in recent weeks. Consider the following news items:

• This year, thieves have stolen at least 50 city trash cans (iron) from the streets of Pittsburgh, with each can now having a scrap value of between $ 1,500 and $ 2,000.


• In Washington D.C., thieves are posing as road crews to steal underground copper wire, causing parts of the city (including traffic signals) to go dark.


• In Chicago, scrap metal thieves are suspected of stealing a handicapped child's wheelchair.


• In Sacramento, thieves were arrested dismantling railroad tracks in broad daylight for the purpose of stealing the metal.

The problem is nationwide and is no longer limited just to copper or just to abandoned houses or houses undergoing rehabilitation. Iron is considerably less valuable than copper, yet thieves are targetting that metal also.

Fuel prices and real estate prices.

The major economic focus in the news recently has been the rise in oil and gasoline prices:

Benchmark crude for March delivery was up $6.35 a barrel, or 7.4 percent, at $92.55 a barrel in electronic trading on the New York Mercantile Exchange.

"The Middle East will remain the market's focus today with moves in the oil price probably the best single indicator of the market's assessment of the wider implications of events there," said Adrian Foster, an analyst at Rabobank International.

Rising crude prices are a particular worry for investors as they reinforce fears of inflation and raw materials costs. They also stoke worries of a big drop in global demand levels, as experienced in previous oil price shocks in 1973-4, 1979 and 2008.

If you want to know how the fuel prices will affect real estate, look at historical information from the previous "oil price shocks" identified above. The real estate market may react in a similar fashion to those prior periods.

Even though Central Pennsylvania has historically been more stable than other parts of the country, the effects of the ongoing real estate downturn appear to be spreading:

Communities once believed to be immune to the housing crash are now seeing devastation in their cities. Seattle, Minneapolis and Atlanta are among these cities according to The New York Times.

Click here for earlier speculation as to the direction of real estate prices.

Cotton price surge matches other commodities; Inflation and its consequences for real estate

I have written earlier about rising prices in such commodities as wheat, fuel and gold. Now cotton has joined the list of commodities with surging prices:

The cotton surge is part of a broad-based commodities rally since the beginning of the year, underpinned by fears over a weakening dollar, healthy demand from emerging markets and various weather-related supply disruptions. Along with cotton, prices of so-called soft commodities such as sugar, orange juice and coffee all have soared, adding to concerns that consumers might soon be paying higher prices for daily necessities.

Surging cotton prices should have the same effect on agricultural real estate as surging wheat prices (although not directly in Pennsylvania).

As commodities surge, the dollar declines.

It is better for investors to consider the effect of an overall commodity surge now before the effect on real estate prices becomes apparent. Rampant inflation, if and when it arrives, will affect all real estate prices regardless of interest rates.

Deflation and gasoline prices.

This article indicates that the U.S. money supply has declined rapidly in recent months, despite runaway government spending.

How this could happen would be the subject of a full length textbook. Suffice it to say that the money supply is composed of many elements, including bank loans. When credit is tight, the money supply gets smaller, regardless of government spending.

A major indicator of the direction of inflation is the price of gasoline. The price of gasoline fell during and immediately before Memorial Day weekend. The price has not moved back up since then. It is unusual for gasoline prices to fall before and during a summer holiday. It is unusual for any prices to fall during a period of runaway government spending.

It is possible that the credit bubble that begin its collapse around 2007 is still collapsing - that the government stimulus bill (and related spending) is merely delaying the collapse. If that is true, the deflation we are experiencing is, ultimately, a good thing. The economy will not turn around until prices get to where they are going, even though the ride down will be painful.

If this scenario is allowed to play out, it would mean lower prices for real estate (accompanied by pain, foreclosures, bankruptcy, etc.), but, ultimately, an increase in sales at the new lower price levels.

Is Inflation kicking in?

Is this the beginning of the inflationary spiral we have feared since the passage of the stimulus bill one year ago?

Stripping out the volatile food and energy costs, core producer prices rose a faster than expected 0.3 percent last month after being flat in December. The core index, which had been forecast to rise 0.1 percent, was lifted by a surge light motor truck and pharmaceutical prices.

"It does present some upside risks to our call for only modest gains in CPI and also points to some possible upward price pressures in the pipeline," Millan Mulraine, an economics strategist at TD Securities in Toronto.

The department on Friday will release its consumer price report for January. Headline CPI is seen rising 0.3 percent from December and core CPI gaining 0.1 percent, according to a Reuters survey.

H/T Reuters v/a Yahoo news.

Click here for speculation on the coming inflation's impact on real estate prices.

Natural Gas prices linked to real estate litigation; Marcellus Shale

The consequences of the ongoing devaluation of the dollar are far reaching and hard to predict. One such consequence has been felt by Realtors attempting to sell raw land in rural areas of Pennsylvania (and other states).

As the government printing press weakens the dollar, prices of commodities, such as fuel, increase. We saw just such a skyrocketing price effect in 2008 with the price of gasoline (and other fuels). When fuel prices shot up, there were many casualties, such as the contracts between real estate sellers and their listing agents. Sellers that had previously signed listing contracts with Realtors to sell their raw land now found themselves with an opportunity. Natural gas prices had risen along with other fuel prices. These rising natural gas prices had made raw land more valuable in many parts of rural Pennsylvania. While this may have seemed to be a welcome surprise to many landowners, many of their properties had been previously listed for sale at pre-inflation prices.

The only way for some land owners to take advantage of the rising natural gas prices was to break their contracts with listing agents (or even sales contracts with buyers). Litigation between Realtors, owners and buyers often resulted.

Keep in mind that fuel prices rose, creating this situation, despite the discovery of 500 trillion cubic feet of natural gas in Pennsylvania and neighboring states (otherwise known as the Marcellus Shale) during roughly the same period as the general commodity price inflation.

Only when the dollar is being devalued at an alarming pace can commodity prices rise despite discovery of tremendous new supplies of said commodity. That same dollar devaluation that caused (1) natural gas prices to react unpredictably and (2) unforeseen litigation will continue to create unpredictable consequences for the economy as a whole, especially the real estate market.

Marcellus Shale - H/T Lycolibrary.org

Mortgage applications reduced to 2000 levels.

Bloomberg reports that home mortgage applications for purchases are down to their lowest level since 2000:

The drop in buying plans points to the risk that the recent stabilization in housing will unravel without government help. In a bid to sustain the recovery, Congress passed and the administration signed a bill last week to extend jobless benefits and incentives for first-time homebuyers, adding a provision that also made funds available to current owners.

This article and this trend indicate that the government considers it to be a problem when buying returns to levels from the year 2000. I remember 2000, and the economy, including the real estate market, did not seem to be in desparate shape at that time. Yet sales at only the year-2000 level seem to be insufficient to avoid dire economic consequences.

This is one of the characteristics of an inflationary era. Economic activity that is sufficient to maintain prosperity for a short time will not be sufficient without substantial increases. In this case, continued government stimulus is necessary to push real estate sales to higher and higher volumes just for the purpose of avoiding the return of 2000 levels. The stimulus acts like a narcotic, and previous levels are never enough.

Inflation may not always be reflected in prices, but it is reflected in trends found at the crossroads of economic output and government stimulus.

Gold prices and the economy

Gold prices have set record highs recently, as the dollar continues to weaken.

gold















Why should this matter to those who are concerned about real estate in Central Pennsylvania? Because gold is an indicator of weakness or strength in the dollar. As the dollar weakens, prices of commodities in general will tend to rise. These price increases will include oil, building materials and other commodities whose prices directly impact the real estate market.

The price of gold does not cause the other prices to rise. The price of gold merely helps indicate the direction of other prices. As we await the disaster that must surely follow the government's trillion dollar "stimulus" bill, gold prices will help provide an early warning of the deluge that is to come.
-------------
update

Dr. Seuss, inflation and the reinflation of the real estate bubble

It has been eight months since Congress passed the nearly 800 billion dollar "stimulus" bill. We continue to await its effects on the economy in general and on inflation in particular. Most of the stimulus money has yet to be spent by the federal government. There are those who hope that the stimulus money and the $8,000 new home buyers credit will spur real estate sales and, in effect, reinflate the bubble. For those of this mindset, nothing could be better than another round of inflation to restore real estate values and start the good times rolling again. If you are one of those people, remember the old phrase, "Be careful what you wish for."

Most people do not know that Dr. Seuss used to write political cartoons before he produced books for children. I found this cartoon from April 19, 1942 on the University of California at San Diego website.

Dr. Seuss on inflation





Do not be in such a hurry to see the government spend the "stimulus" money. Once Washington begins forcing the money through the economy, you won't like the consequences.

Inflation adjustment clauses in leases.

Ever since the "stimulus" bill was passed in February by Congress, we have been waiting for the inevitable inflationary results. We do not know how bad the inflation will be. We do not know how fast the government will force the new money into the economy.

In any case, real estate investors should prepare for the worst. If you own property and lease it to tenants, it would be wise to include a clause in your lease that allows the rent to be adjusted to keep pace with inflation. Otherwise, you will see your expenses skyrocket while your rents will be locked in by the term of your lease. This is especially true in commercial leases that last longer than one year. Over the course of a year or more, inflation could skyrocket more than we have seen in our lifetimes, depending on how fast the government lets the new "stimulus" money percolate through the system.

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.

Inflationary pressure on housing prices; Lawrence Yun

An article at CNNMoney today claims that the leading home price index rose in July. But this trend may be only temporary according to the chief economist for the National Association of Realtors:

Yun points out that there will be another foreclosure spike over the next six to 12 months as the terms of option ARMs and interest-only mortgages reset, raising monthly payments for many borrowers and pushing some into delinquency. Foreclosed homes will continue to come back onto the market, padding supplies and dampening prices.

Lawrence Yun - National Association of Realtors
















The downward tendency caused by foreclosure activity is being countered by the economic stimulus package passed in Washington in February. With hundreds of billions of new dollars being injected into the economy, the prices of all products will increase. The $8,000.00 first time homebuyers' credit adds to upward pressure on real estate prices:

The other major uncertainty is over the first time homebuyers' tax credit that currently gives back up to $8,000 to taxpayers who buy before Dec. 1 and who have not owned a home within the past three years.

An AP report today confirmed the potential inflationary pressures on the economy as a whole:

To prevent inflation from taking off, the Federal Reserve will need to start boosting interest rates quickly and aggressively once the economy is back on firmer footing, Fed officials warned Tuesday.

Any such action by the Federal Reserve may curb inflation, but will curtail loan activity as interest rates rise.

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.

See Bubble Meter for more information.

previous - Mortgage foreclosures - a catalyst for real estate fraud?