Bernanke’s crystal ball is seeing slow (but not negative) growth

If anyone were to say that 2008 started with a bang, they’d probably be referring to the sound of our stock market dropping like an anvil on the 1st.  Woo hoo.

However, the rationale behind the drop is not what the recessionistas of the world want to hear.  Fundamentals backing our economy are strong.  The upcoming general slowdown will force inflation back into check.  Many ask when the loss of wealth from the housing slump and high gas prices will affect the consumer on an appreciable scale.  So far, the answer is…no.  Not ever.  Never ever.  We like to spend money.  We like to trade in our ’05 Mercedes Benz because the ’08 model has a voice-activated MP3 player hook-up (and life wouldn’t be complete without that).  Holiday spending was pretty blasé, but not terrible.  A heaping helping of mediocrity.

A Limited Cure for RecessionBut mediocrity does not equate to a recession.

We have admittedly been spoiled over the past few years with rapid growth as capitalism spread its glorious wings across the world and investors found plenty of resources to exploit and profit from.  Globalized capitalism has also provided a strong buffer to any wild swings in our economy.  Most major economic indicators haven’t changed as dramatically as most would have expected, given the housing downturn and the subsequent credit crisis.  Unemployment did hop up to 5% which is an uncomfortable level for policy-makers, but that’s no reason to riot in the streets.  We knew this was coming, and most stocks have already priced the inevitable slowdown in.  So, beyond crimping consumer spending a tad more, it should not be viewed as a sign of the apocalypse.

Many question whether or not the Fed is staying ahead of the curve and stimulating commerce enough.  From an inflation-hawk point of view, thus far, I can’t complain about the Fed’s performance.

Oil prices continue to draw attention, though they’ve stabilized around $93 per barrel over the past few days.  We have had multiple trading days where crude oil went over $100 per barrel (which would translate to a national average of about $3.15-$3.25/gallon of gas).  This alongside a weak dollar and weak manufacturing data is bad news for inflation worriers. Read More

How To Sell That Condo

Seller’s expectations are still too high when it comes to price. How do I know? Look at our Zip Code of the Week (below). November to December 2007: 163 Orlando condos listed – 6 sold = 157 unhappy sellers. True, there may be several reasons for the lack of sales – one of which is that buyers can be incredibly slow to catch on, and also the fact that it’s harder to get a loan these days – but in most cases, the seller is still hoping, against hope, to get what they think they deserve - instead of waking up to the reality of today’s market.

Buyer’s are are cherry-picking the best condos from each community – but if you’re truly motivated to sell and just aren’t sure how to price your Orlando condo, you might want to consider ‘absorption rate pricing’ (ARP) – which asks not how much you want – but how quickly you want to sell.

sold condoStep 1: Work with your agent to find out how many Orlando condos entered the market in the past 6 months, how many sales closed during the same period.

Step 2: Do the math and divide the closings by the listings. Using above numbers, if there are 6 closings out of 163 listings, then you have about a 3 percent chance of selling your condo in that zip code in that time frame. Ouch!

Then do this: Figure out how many sales fitting your search criteria were closed in the past year and divide that number by 12. You’ll now know how many condos closed per month (on average). Divide the number of listings by the average closed per month and that will tell you how many months of condo supply exist in your chosen market. I’d do the overall Orlando condo math for you, but I won’t. Because if you’re a seller you’d probably burst into tears. (How does 18-24 months sound?)

Using the ARP method, you can figure out how aggressive you need to be using time instead of price as your yardstick. If you desperately need to sell in the next 3 months and there is a two year supply of condos, then you may need to get real. Look at the prices of the condos in your own development that have sold and price your condo in that ballpark – or just below, because the unhappy truth is that in many parts of Orlando, there are only two hopes that you can sell your condo – no hope – and Bob Hope… unless you do something pretty drastic to make it attractive to a smart, bargain-hungry buyer who just knows they deserve a great deal.

Absorption pricing will give you a sixty day price, a ninety day price and so on. It doesn’t guarantee a sale – but you should get a couple of sniffs at least. The rest is up to you.

Adam Smith must be rolling over in his grave right now

Arguably the father of modern economics, Adam Smith was a proponent of a Laissez-Faire style of economics.  Translation: government does as little as possible and the natural laws of supply and demand will determine price levels and purge the market of any impurities.  Very much a “might makes right” kind of approach.  Admittedly, there are certain functions that government must perform in a regulatory capacity to keep the playing field level, but things seem to have gotten out of hand.  Exactly like a drug-addict, we are addicted to economic intervention by our leaders.
Put yourself in the shoes of a big-time investor for a second.  Let’s say you bought a heap of stock that paid dividends well below normal market levels however you knew it would balloon into beautiful returns two years down the road, guaranteed.  Two years later, the numbers change and the returns jump up to very attractive levels.  But your dividends don’t change.  Not one iota.  You furiously call up your stock broker and he simply says “Oh, they needed more time at the initial rate.  Tough times out there.  Just give them another 5 years.”
The Big FreezeHow does that make you feel about that investment?  Like not investing in it, perhaps?
That’s exactly the story in the world of the mortgage-backed securities market.  President Bush is outlining a proposal to freeze adjustable rate mortgage interest rates at the “teaser” rate for 5 years if homeowners can prove that they are making the payments now and will not be able to make the payments later.  This means that the difference between what was promised to the investors and what they are actually going to get is going to hit somewhere, and it is going to hit hard.  Reduced confidence in mortgage-backed securities (if it CAN be reduced any further) will force consumer interest rates up to compensate for the loss of returns. Read More

Will Bernanke Stop the Sky from Falling?

Fact:  China needs our discretionary income and consumer sentiment to stay high so they can maintain export levels and sustain the bullish run they’ve had in GDP.
Fact:  If we go down, we are chained to so many other economies that we will bring the world kicking and screaming with us.
Opinion:  The Federal Reserve has shown a pronounced recency effect, where they basically only remember what happened RIGHT BEFORE they make any major decisions.
I know Fed Chairman Bernanke wants to be viewed as a stalwart rock, unshaken by the day-to-day tribulations of us commoners and adhering to monetary policy that works wonders in the hypothetical realm of theory.  He even went so far as to say the last rate cut decision was a “close call”, implying that the chance for future cuts is slim to none. 
Chicken LittleHowever, it seems he and the rest of the Fed governors keep getting dragged back down to Earth by the rising din of the consuming populace.  The contagion effect of this credit crunch is really starting to take form, as one collateralized debt obligation (an investment tool used by the majority of large funds out there which are typically heavily invested in mortgage backed securities) topples right into another.  “Write-downs”, something we haven’t heard about on a large scale in a loooooong time, is becoming a household word as major financial institutions downgrade and devalue their own holdings.
Additionally, at the first opportunity the Fed has after deciding to be more transparent they have nothing but dismal news.  Growth is anticipated to slow and default rates on mortgages are expected to rise in ’08.  Gasoline costs chip away at our spending power as crude oil marches relentlessly towards $100/barrel (which could equate to $4.00/gallon of gas for you and me).  Major investors are leaning away from the retail sector (which is usually supposed to EXPLODE in December) due to waning consumer confidence, tighter credit standards, and a decrease in household wealth.  Recession or no recession, we are slowing down dramatically.  Freddie Mac, a governmental institution entrenched in the mortgage market, has experienced a 50% stock value drop since October 1st of this year.  If the Fed does not proactively attack all of these problems, they are going to tick America off in a big way.  Read More

A glimpse behind the wizard’s curtain

At 9:10 on Wednesday, November 14th Fed chairman Ben Bernanke gave a rousing speech at the CATO Institute concerning transparency of monetary policy and future Fed movement. Since it took about an hour to say, I’ll do my best to hit you with the highlights.

Ben reiterated that he practices a method of policy orchestration called Inflation Targeting, then promptly conceded that a single-minded focus on the economy is ill-equipped to handle the dual mandate of the Federal Reserve (to maintain price stability and maximum employment). This led him to announce his shift towards a more “flexible” inflation targeting approach (another hint at soon-coming rate cuts). He also noted the importance of policy transparency for investors in our economy. To that end, the following changes are being implemented:

wizard1) The Fed will be increasing the horizon of financial forecasting from 2 to 3 years (evidently they added a turbo-charger to their crystal ball)

2) The Fed will be doubling the number of annual forecasts from 2 to 4 times per year

3) The Fed will post all the differing opinions of the various Fed governors as opposed to giving a homogenized position, allowing the general public to better understand the dispersion of viewpoints at any given juncture Read More

Florida to see drop in condo starts

A recent forecast report released by the National Association of Home Builders projects that Florida state, and in particular metro areas within the state, will experience the steepest declines in housing starts this year compared to last year.

Housing starts in Florida are projected to fall from 198,900 in 2006 to 103,300 this year, a massive 48.1 percent drop, the builders group reported. Florida is home to nine of ten U.S. metro areas with the sharpest projected drop in housing starts from 2006 to 2007.

brick wallThe Sarasota-Bradenton-Venice metro area is top of that list, with a projected 67.5 percent decline this year compared to 2006. Next on the list was the Cape Coral-Fort Myers, Fla., metro area, with a 61.4 percent projected drop.

The other metro areas on the top 10 list are expected to see a 50 percent or greater slide in housing starts from 2006 to 2007.

Verdict? A shrinking number of condo starts combined with the total failure of other projects, plus the return of many conversions back to rentals, means that condo inventory is on the decline all over the state – great news for sellers – but perhaps not so great for buyers. 

Less condos = higher prices. Ergo, 2008 could signal the beginning of the end of a strong buyer’s market. After all, it can’t last forever – any more than the sellers’ market did.

The writing is on the wall.

Overseas Condo Buyers Flock to Orlando

I was a kid the last time the dollar was this weak against the Great British pound, but right now for every pound a Brit brings to Orlando, they get over two dollars ($2.09) in return, effectively doubling their money – and more than doubling it when you take into account how much more expensive the U.K. is. This makes buying Orlando condos a no brainer. Combine this with the current heavy discounts in the Orlando condo market and you’d have to be a fool not to invest.

Our Canadian neighbors are enjoying a similar state of affairs. The Canadian loonie has parity with the U.S. dollar for the first time since 1976! It’s checking in today at $1.09 having risen 22 cents this year alone against the U.S. greenback, making it the world’s best-performing major currency.

union jack flagWhile the loonie is expected to stay strong, in the U.K. the situation is expected to deteriorate, with some expecting the rate to drop back to as low as $1.70 next year.

Overseas buyers need to take advantage of this situation while the going is good. Because if the exchange rate tanks, it has the potential to completely wipe out any great condo steals you may have found during your Orlando vacation.

Grab some popcorn and settle in for the slowdown

I’d like to start with a less than encouraging quote from Fed chairman Bernanke: “Overall, the Committee expected that the growth of economic activity would slow noticeably in the fourth quarter from its third-quarter rate. Growth was seen as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane.”

Unless the housing correction DOESN’T wane. A frightening thought, but one that must be entertained nonetheless. This will lean our country’s financial decision makers decisively towards a more facilitative policy.

Inflation is on the horizon, and there’s really no way to stop it. High oil prices will percolate into all markets and drive prices upwards. The good news is that it doesn’t seem to bother the Federal Reserve one bit. Write-downs continue to plague the financial sector of the stock market, as re-valuations of collateralized debt obligations (which are chock-full of subprime mortgages) reduce overall portfolio values. Bad news for investors. Stock market continues to yo-yo on an almost daily basis, bouncing from gain to loss to gain again. Not necessarily bad news, but it will make the financial bulls a little more gun-shy.

BernakeAll of this shifts the powers that be yet again from the ‘absolutely no chance of a rate cut at the next meeting whatsoever’ stance to the ‘we’ll keep our eyes on the numbers and act as necessary’ stance. That’s pretty close to where we were 1½ months ago and we ended up with a cut. Go figure.

The weak dollar seems to be driving a lot of movement behind the scenes. For example, foreigners are vacationing here for cheaper, so Disney is rocking and rolling. A good thing for our local economy.

My opinion on the future: Recession? Not likely. Anemic growth for a while? You betcha. Real interest rates, as measured by the Federal Funds Rate (4.5%) minus core inflation (1.8%) are still notably higher than the average “Goldilocks” level (not too hot, not too cold) of 1.5%. Additionally, a recent strong read on productivity will help stave off core inflation even longer. That would imply that the question is not if the Fed will cut rates again, but when.

Orlando’s Buyer Market: Game Over?

fence sitterTake a gander below at the condo projects that have gone south in the last month or so. It’s depressing. Or is it? What else does it signal? (other than an increase in the sales of Head On: Apply Directly To The Forehead).

I’m going to stick my neck out here and suggest that this “correction” might just signal the beginning of the end of the condo buyer’s market in Orlando. Because the combined value of these monthly flops is many thousands of condos that will never see the light of day – which means our condo inventory may be being absorbed faster than predicted. And as condo inventory is absorbed, the tide will inevitably turn. Reduced supply = increased prices. And of course, incentives like free HOA fees and granite counter tops will also disappear.

So, if you’re still sitting on that proverbial fence after Christmas, you might just to move before that piquet gets even more imbedded and you find yourself impailed there, left behind – with a numb behind.

For those who are trying to keep up with what’s hot – and what’s not, here’s the latest news and gossip from the Orlando condo scene. Rumor has it:

In MetroWest, The Element (condo conversion) is in receivership (but still selling); The Greens (condo conversion) has gone back to rental due to lack of sales (shame!); and The Madison (condo conversion) is all but closed while it restructures prices and incentives (again).

In Maitland, the Oasis (pre-construction) condos have been scrapped. Construction continues but the units will now be apartments. On the other side of the I4 freeway, Ravinia (pre-construction) opens its doors as Trevi’s new neighbor, against all odds, with 297 condos for sale.

In Baldwin Park, The Majestic (condo conversion) which has had more offs than ons, is finally “off” for the last time, while further south in Celebration, the stunning Icon (condo hotel) has been halted before the first spade of dirt was moved while they clean up their mess in Miami

Back up in Altamonte Springs Park Towers condominiums have been put on hold for at least a year and in the Millenia area, The Fountains (new construction) condos have converted to rental even before the last crane leaves (with 150 condo contracts down the drain). “Check’s the mail!” In Winter Springs, Isis is on a slow down - as are most of the downtown projects. Has anyone seen that crane at 55 West move this month? Finally, in the Dr. Phillps area, the developers much hyped Intermezzo at Rialto shut down the sales center last week and will now build apartments instead of condos.

Got the scoop on an Orlando condo community? Email tips to:

Tonight’s Match-up: Inflation Threats vs. Economic Slowdown

The Cons of Cutting Rates:
Dollar’s declining value (if the Fed makes it easier to lend, more money will move in to circulation. A higher money supply decreases the overall value, making imports more expensive and consequently causing inflation.)

High Gross Domestic Product (3rd quarter GDP came in today at 3.9%, a hot measure. If we get to producing too much, employment and wage inflation will both flare up, meaning consumers have more spendable capital. When businesses see that their customers have more money, they raise prices to make better profits, which is inflationary)

Inflation (The Consumer Price Index, Personal Consumptions Expenditures Index and Wage Inflation gauges are all above what the Fed has said is their respective “comfort zones”. A lot of this can be blamed on gas price increases, but it begs the question of whether we have already boarded the bullet-train to inflation town. So, as long as you’re not interested in eating, travelling anywhere or heating your home any time soon, you should see no change in your monthly expenses.)

boxing glovesThe Pros of Cutting Rates:
Weak housing and financial sectors (due to failing subprime mortgages being included in a ton of different mutual funds and investment vehicles, as they fall they take the whole financial sector of our economy with them. This is “arguably” spilling over into higher unemployment and a national slowdown in property appreciation)

Credit crunch (institutional lending has slowed down dramatically, so the Fed may want to re-ignite them by making wholesale lending more attractive through lower interest rates. This will increase the banks’ profit margins overall and allow them to entertain the idea of exposing themselves to more risk and loosening lending guidelines, allowing more people to borrow)

The Verdict: ¼ cut to Fed Funds Rate:
Buckle your seatbelts, kids. This may be a very short and fast ride. Further loosening of money will only last as long as inflation stays tame. And unless we see a drop in oil prices (which isn’t looking likely) coupled with a slowdown in consumer spending (which the holiday season will not allow), expect inflation measures to rise. My advice: if you’re looking to guarantee yourself a deal, now is the time to do it. The Fed will double back and raise rates if we see inflation start to skyrocket. Waiting around at a time of such volatility is literally gambling with your financial future. Read More