Good news on the interest rate front

[SHELLY]

The Bank Lending Rate also affects corporations and manufacturers who wish to borrow money for expansion. Expansion means more jobs, more spending, and home buying.

Truth be told, many corporations are sitting on a MOUNTAINS of cash (the markets have been berry-berry good the last couple of years) with nowhere to put it and it is a problem. Companies like Microsoft and Exxon are making big bucks just in interest income alone. A lot of the companies are using excess cash to buy back stocks, some are buying up other companies, some are considering increasing dividends. Making loans is the least of their worries; finding ways to turn this money into profits for the shareholders is a major concern.

Many people are under the impression that the Fed Funds Rate directly affects bond rates. It has some impact, but there is no direct relationship. There are many other economic indicators, factors nationally and globally that can impact bond rates.

You're right, but it is a bit complicated to explain without textbooks, a flip chart, and PowerPoint slides but here goes.

Essentially what the FED does is raise the target for the "discount" rate which is the rate banks have to pay the Federal Reserve for overnight loans. (Which increases the amount of money they can lend out).

Which in turn has an effect on the "Fed Funds Rate" which is the rate banks charge to each other for overnight loans.

Which has an effect on the "Prime Rate" which is the rate banks charge their best customers and sets a "floor" for interest rates charged to customers who make loans for cars, plasma TVs and HELOCs (although HELOCs can be indexed to other things like LIBOR or Treasury Bonds rates) . Although banks are free to set their own Prime Rates, they all usually are the same; the prime rate runs about 3% above target discount rate (5.25%) and is currently 8.25%.

Therein lies the problem. The American population, as a whole, is swimming in debt--a lot of which is credit card and equity debt tied to prime. Inflation results when there is too much cash chasing too few goods which bids up the price of the goods. America has been awash in "free" money for the past couple years and now the FED is attempting to turn off the money...they're doing this by raising the target on the discount rate so it will trickle down to the consumer's level and get them to stop using their credit and pulling money out of their homes (that the banks are happy to give you today, if you pay them back interest--like...forever).

Where does the FED get its money in the first place? Here's the other side of the equation: It gets money by selling US debt in the form of bonds. Bonds are sold (mostly to foreigners--it appears) who hand over their money to the FED in return for interest rates they believe are attractive given the risk involved (which for quite a while wouldn't budge even as the FED raised rates again and again--Al's Conundrum). The money turned over by the foreigners then flows into the Federal Reserve and the FED lends it out overnight to banks that pay the "discount" rate, who in-turn lend it to other banks overnight who pay the "fed funds rate," who lend it to you at "Prime+" to buy the Plasma TV which is made in China. The money you borrowed eventually makes it over to China who then buys more US debt...... and......ALL TOGETHER NOW GANG!......Shampoo, Rinse, Repeat. :

 

[SHELLY]

I only am licensed in N.Y. and CT., and I run my shop differently than some brokers and Bankers. I won't do a loan if I do not think that someone can not afford it regardless of the fact that I can place it with a Lender that will do the deal or not. I also wouldn't put people with fixed incomes in ARM loans simply because the rate was lower, and it could get them a bigger house.

I wasn't referring to your business specifically; I'm sure you did the right thing by your clients.

But as I see it, the way you ran your business WASN'T the "rule" for the majority of the industry --I doubt NY and CT were any different from the other 48 states where illegal and unethical practices were pretty much business du jour.

 

[Mango]

I wasn't referring to your business specifically; I'm sure you did the right thing by your clients.

But as I see it, the way you ran your business WASN'T the "rule" for the majority of the industry --I doubt NY and CT were any different from the other 48 states where illegal and unethical practices were pretty much business du jour.

Shelly, you make it sound like the majority of anyone in the real estate services industry is totally responsible for the woes of the entire nations economic condition and everyone who was in the business was a pig.

Your question to me was did I think that my clientele was the norm nationwide. I told you I was only licensed in 2 states. These states amongst others nationwide had large appreciation jumps. Those states are usually the ones which have more employment opportunities, and I was basically saying and responding to pirate as well, that not all the money dumped into the economy was from used equity run up. Some people simply used money that was available to them cheaply and had the ability to repay it when rates go up.
I am sure that in the States that did not have appreciation run up (and there were) there were more unethical practices to maximize financing and or to get higher sales prices and I can honestly say that some of the things I saw go on in the panhandle from a real estate perspective would have never occurred in States that had more regulation in place.

All I did was post originally that the Feds did not raise as anticipated, and instead of discussing the possible economic paths that move may bring forth, we are once again in a debate over real estate practices.

 

[SHELLY]

Shelly, you make it sound like the majority of anyone in the real estate services industry is totally responsible for the woes of the entire nations economic condition and everyone who was in the business was a pig.

No, not everyone, but certainly all those who knowingly took advantage of naive people and put them into a position where they would be financially crushed as a result.

...and certainly those who pulled political strings in order to allow destruction of protected wetlands, beaches, and wooded areas to reap big profits.

...and also the cabal of thieves who colluded amongst themselves in order to maximize ill-gotten gains.


For those who ran a clean business throughout.... :clap_1:

 

[Bob]

Bob respectfully, I'm not sure I understand...are you suggesting that high energy prices (doubling) are going to drive ci to the point that demand will be overwhelmed...When?...do they need to double again?...The Fed hikes revolve soley around the idea that the economy is growing too fast...There is no hyperinflation or stagnation of the economy...Real GDP will "moderate" to 3.25% from 4-5%, inflation to 2% at statistical full employment...Are you really suggesting, like some of these other knuckleheads, that a Volker-type response is possible...Bob, don't doubt the supply side...

Redfisher, believe it or not, but we could end up in a stagflation scenario in a few months. Bernanke is an academic whose focus is on targeted inflation rates first and foremost. In the near future oil prices could easily force CI too high. The Fed can only influence the cost of borrowing, not oil. A Volker-like response would stop inflation at the cost of the economy. Just look what a 1.5 point bump to the 30 year money has done to real estate...lights out, because home prices became disconnected to wages. Supply side tax cuts plus massive spending deficits,Greenspan's free money policy, and unlimited cheap labor by millions of illegals have been the bedrock of the latest economic expansion. OPEC has already brought Detroit to its knees, and now I hope that OPEC will not corner us with $100/barrel oil stagflation. How long can Washington maintain 200-400 billion dollar budget deficits, and how long can John Q Public borrow on home values going nowhere. I believe the absence of dissent caused the war in Iraq, and easily the most chaos the Middle East has seen in 60 years. I am only a regular knucklehead who does not look to the 3 mil a year bimbo reading the news on CNN or Fox to question our leaders. P.S. Supply side theory holds that tax cuts stimulate savings for investment. What's the personal savings rate in the U.S. now?

 

[redfisher]

Please give your rational for this statement.

My rational should be obvious...Stock option plans (technology or otherwise), 401k participation, equity mutual funds and the rise of discount brokers, at the time Enron was part of the S&P 500...

http://money.cnn.com/2001/11/29/funds/enron_funds/

How many people would you estimate participated in the 5 mutual funds listed (through 401k's, other retirement plans, or direct investment) in the above link???....

 

[Pirate]

More people own stock than own homes?

I wanted to point out the fact that the new method of computing CI (formulated in the late 1990's) really hasn't been tested and is ridiculous in my opinion. Substitutions make it unreliable and risky to use as any kind of benchmark. Keep in mind housing ownership isn't included at all. I would also add that the disconnect between the cost of housing and wages happened because the Fed lowered the rate too low for too long, not because the rate is being raised too high. The CASH price of a house should be the only method used to make any computation, not how much you have to give to the bank every month for the pleasure of maintaining it. The credit mentality just kills me.

The cheerleaders here keep saying price fluctuations always happen with beach real estate but name another period where there were 200-300+ percent increases in a few years. Ummmm ... never happened.

 

[redfisher]

Redfisher, believe it or not, but we could end up in a stagflation scenario in a few months.

Bob, I'd like to ask a couple of questions;

1. Are you suggesting a Volker-like response would somehow reduce the cost of oil or simply limit demand while keeping oil prices high?

2. In what area of r/e are the lights out...In our own little slice of heaven, it seems prices are down 30% (homes) - 50% (lots) from highs to mid-04 levels?

3. How has OPEC dropped Detroit to its knees? Is the global auto industry on its knees?

4. As a percentage of GDP, what is the average budget deficit? What is the cause of the current decline of the deficit?

http://www.cbo.gov/budget/historical.pdf
http://www.cbo.gov/showdoc.cfm?index=7184&sequence=0


5. Is the current Middle East conflict more or less extreme than the oil embargo in '73 or the Lebanese occupation from '82-'2000

6. http://www.bea.gov/bea/newsrel/pinewsrelease.htm Bob, you are absolutely correct that Supply Side theory holds that tax cuts stimulate capital to do a variety of things...Is the saving of that capital somehow dictated by the government, or is it the individuals right to spend or save the surplus?...

Bob, sorry it took me a bit to respond..I missed your response...Regards, Red

 

[SHELLY]

How many people would you estimate participated in the 5 mutual funds listed (through 401k's, other retirement plans, or direct investment) in the above link???....

Many of the same speculators who got caught up in the stock market bubble are the same people who are now caught up in the real estate frenzy. Add to those folks the home owners who cashed out equity to finance "bread and circuses," the people who were able to borrow large sums of money just by "fogging a mirror" using NINA (no income no assets) or "liar loans." And then the worse case of all--those who have daisy chains of houses who bought a $90,000 shack for nothing down, cashed out inflated equity, used that equity to buy 2 more homes, cashed out equity, used that equity to qualify for 2 condos and 2 pieces of land, etc., etc.

All the money tied up in the stock market at the bubble pales in comparison to the debt that is wrapped around housing market. And a whole heck of a lot of that debt is tied up in the U.S. banking system, 401Ks, nest eggs of grannies everywhere, and in 69% of the Americans who are "Home-OWERS."

The unluckiest speculators in the stock market lost ALL of their money when they bought Enron at $90 and rode it down into the ditch (and usually doing "mon-backs" as the price dropped day-by-day). HomeOWERS who cashed out equity in their homes or paid sky-high prices based on fantasy appraisals in a hot-hot-hot market may have to bring a check to closing because they find they are underwater on their loan--now that is a bad "investment."

For those of you who like a graphical representation: Here is a chart showing the NASDAQ vs Housing Stocks

As this housing situation continues to unwind, we'll see just how hard a "soft landing" can be.

 

[redfisher]

. All the money tied up in the stock market at the bubble pales in comparison to the debt that is wrapped around housing market. And a whole heck of a lot of that debt is tied up in the U.S. banking system, 401Ks, nest eggs of grannies everywhere, and in 69% of the Americans who are "Home-OWERS."


Quantify the stock market losses globally (2000-2002) as compared to speculative loans on housing (2001-2005) please...