Wednesday, June 28, 2006

Federal Reserve Board Starts Two Day Meeting

The Federal Reserve Board starts its two day meeting today. June's meeting is a big one as the tightening cycle will be ending shortly.

Despite, the speculative talk of 50bps increase in short term interest rates, I am still predicting a 25bps increase at tommorow's announcement. That would bring rates to 5.25%.

What will happen at August's FOMC Meeting?

26 comments:

  1. Another 25 BPS increase.

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  2. david, give it up already..5 and done, yeah..
    well you will see fed at 6 by yr end.
    and inflation would still be a problem. gotcha

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  3. Its very, very unlikely to go to 6 by year's ends. 5.75% max! More likely 5.5%

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  4. I'm curious, if this is a bubble, and we are seeing the pop.
    Isn't that a good time to buy?
    I mean since homes are on the market for so long and prices keep dropping. If you have the money, (ie 20+% down) why not wait a little bit and buy on the cheap?

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  5. its just the start of the decline in the bubble markets. Much better deals are coming in the coming years.

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  6. David,

    "David said...
    its just the start of the decline in the bubble markets. Much better deals are coming in the coming years."

    You should put this quote up on the masthead of your blog (with a date of posting, of course) ... Something we can discuss in coming years ...

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  7. Yeah, Lance -- in the coming years when your real estate job has been cut and you're at some $50/year USG desk job.

    You know, they'll put limits on the amount of working hours you can spend blogging, instead of being productive...

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  8. I'm curious, if this is a bubble, and we are seeing the pop.
    Isn't that a good time to buy?


    Historically, once home prices have begun declining they continue declining for years due to secondary economic impact declining real estate typically has.

    Unless this time is different, now would be an unwise time to buy.

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  9. Phoenix inventory up 188% in 9 months.
    It was 175% in last week's report.

    http://www.benengebreth.org/housingtracker/location/Arizona/Phoenix/

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  10. anon said:
    "Historically, once home prices have begun declining they continue declining for years due to secondary economic impact declining real estate typically has.

    Unless this time is different, now would be an unwise time to buy."

    Didn't someone just post a Washington Post article from today showing (a) established neighborhoods in the District have flatlined in price while (b) transitional neighborhoods continue to go up in price by leaps and bounds? Wouldn't it make more sense to buy in one of these transistional neighborhoods now before the prices rise even further? Or is it "bubblesense" to instead wish upon a falling star that prices will suddenly and magically fall even thought that has NEVER happened in US history before? "Bubblesense" ... I like that new word! It's aking to "Bubblespeak" and "Bubble-economics"! "You click your heels, wish upon a star, and all your dreams come true!" Ignorance truly is bliss, isn't it?!

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  11. Lance - Someone just posted selected excerpts from the Post, yes. What wasn't discussed in the article was the volume surge in "marginal" neighborhoods last year. Remember, 54% of all mortgage originations in DC last year were for Interest Only loans. Does this suggest speculation, or an affordability issue? I will leave it to you.

    And here are some excerpts from that article that the previous poster apparently didn't think important enough to share:

    "Housing construction in the city began in earnest in 1998 but hit a 40-year high last year. The city issued 2,860 permits for new housing units in 2005, an increase of nearly 50 percent over 2004 and the highest number since 1966, the study found."

    "And the pace of new construction this year is unabated. In the first three months of this year, the city issued 1,327 building permits, up 135 percent over the same period last year."

    "Nearly all the homes under construction this year and last have been condominiums or apartments, as opposed to single-family housing."

    "More investors are buying housing in the District, especially condominiums, the study found. In 2004, 20 percent of condos were owned by investors; last year, that figure increased to 34 percent."

    "Everyone's trying to get on that bandwagon and make a quick buck," Tatian said. "It's adding to the price pressure that we're seeing."

    Lance, I have complete faith in your ability to find the pony in this particular pile of manure.

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  12. Lance, there have been housing bubbles before that deflated substantially. Your lack of knowledge is showing.

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  13. Addressing this to Lance,

    Following up from another thread, which was locked by the site administrator.

    It's funny that you praise the legacy of the FDR New Deal programs. Did you know because of government intervention sort forth by FDR; the income gap between Americans decreased. Yes, government policy changed the market place so a more level playing field can exist. The poor, the disabled, the elderly, impoverish children received the public funds to help make themselves productive in American society.

    I am advocating that local government take an activist role in the same spirit as FDR and LBJ so lower income Americans have affordable properties. Capitalism failed our society in 1929. Free market capitalism without limits has failed to provide adequate health care, education, environmental safeguards, and yes...fair housing opportunities for impoverished Americans. The real estate industry has NO incentive to make this happen.

    So I am confused Lance. You celebrate the achievements of the social welfare system that glued this nation together. Yet, when I advocate a similar remedy for housing...you change your tune by making an exception.

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  14. Or is it "bubblesense" to instead wish upon a falling star that prices will suddenly and magically fall even thought that has NEVER happened in US history before?

    Is this guy for real? Home prices have most certainly fallen - just not the median average nationwide. Although, there is a first time for everything - this bubble may be bad enough to abolish that truthiness forever...

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  15. DC_Too said...
    Lance - Someone just posted selected excerpts from the Post, yes. What wasn't discussed in the article was the volume surge in "marginal" neighborhoods last year. Remember, 54% of all mortgage originations in DC last year were for Interest Only loans. Does this suggest speculation, or an affordability issue? I will leave it to you.

    Actually, interest only loans in a lot of cases make a lot of sense. I mean a lot of sense! If you are only going to live there for 5,7,10 years or less, why pay any principal? Get the I/O that approximates the time you plan to live there. If the house appreciates, you sell it for more. If it stays flat, you sell it and write a check at closing. But that's not such a bad deal if you saved during the time you were living in the home. All of this assumes that you have not paid more (much more) than what the house is worth. Even from an investor standpoint it CAN make sense. People that swear this is a bubble should look to California as the bellweather. Banks in Cali are getting really innovative. 40 and 50 year mortgages are becoming more common. Sure that suggests affordability and to some extent speculation. But it was not 20 years, that the average joe could not afford a Mercedes. Financing over 4 years would have killed him. But I think Volvo was the first to offer longer term loans. In other words, banks and the products they offer will evolve to appeal to the widest audience possible. As a real world example look at Fannie Mae. I used to work for Fannie Mae. 15 years ago, they never hedged securities with swaptions, caps, floors, and other exotic instruments. The market of suitable counterparties didn't exist. But as the market matured, fannie was able to expand their list of products. In turn, this allowed people to be able to afford homes that they never would have been able to afford previously. Banks are slow. But the motive to make money assures you that there will be products to allow people to continue buying homes. Our economy literally depends on it.

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  16. Suggest speculation? The Post article flatly stated 34% of all condos purchased were for investment purposes. Which matches up very well with the proportion of units for sale in many of these buildings.

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  17. Nathan said: "I used to work for Fannie Mae. 15 years ago, they never hedged securities with swaptions, caps, floors, and other exotic instruments."

    dude, you're kidding right? you're using Fannie as a good example of financial innovation?

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  18. Haudi - not to belabor the point, but in order to arrive at the 34% figure, one may only count those transactions in which the buyer "flatly stated" his intentions as an investor. The 34% figure will rise proportionaly, with every buyer who presented himself innacurately as intending to occupy the residence.

    Do you think it's possible anyone has fibbed about this?

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  19. Considering that the Fed has raised rates 17 straight times (as of tomorrow) and inflation-adjusted GDP has barely BUDGED in the last two years (~3.7%) we are nowhere near done with rate increases.

    The Fed would like to stop, but they won't be able to until people stop taking out loans or banks stop making them. Raising rates doesn't tighten credit unless it changes behavior.

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  20. I just want to say thanks to David and the other faithful bloggers. I'm a potential first time buyer who has learned a lot from reading on this blog and others. I read the report on DC home affordability and I found it very interesting. I think people assume that because folks move to places like Wards 7 and 8 that they will automatically develop into the same kinds of areas as those in other wards such as Logan and Dupont Circle. There have been other development efforts in places like Anacostia and near Alabama and Missippi Avenues that have been built in the last few years. I am wondering how long people think it will take for these areas to really take off so to speak? Thanks for all the great information.

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  21. ihateyuppies said:
    "So I am confused Lance. You celebrate the achievements of the social welfare system that glued this nation together. Yet, when I advocate a similar remedy for housing...you change your tune by making an exception."

    FDR's policies made it possible for more Americans to share in a piece of the pie by putting into place policies that ensured that the average person didn't get "run over" by his more powerful employer or others. What you were advocating is "taking" what others have and redistributing it to those in need. In my opinion at least, those are two very different concepts. One protects the weaker individual from being taken advantage of, the other helps the weaker individual by litterally stealing from the individual/organization that is perceived to be stronger. It's the difference between ensuring workers get a fair wage, medical care, pensions, etc. and putting into effect rent controls, taxes on luxury items, etc. In the first instance, the government levels the playing field by giving the weaker individual/group back strenght to match the stronger individual/group he is dealing with or worker for. (For example, I am all for regulations that ensure rental agreements not be one side-ed.) In the second instance, you have government bureacrats using others money or resources to make decisions that the marketplace and not any one individual (or government entity) should be doing. In addition to the distinction being a matter of fairness, it is also a matter of efficiency. Free markets are efficient. Central planning committees are not. (Look at the Soviet Union). Free markets allocate resources to their best and highest use very quickly. Central planning (which is what you get when you get government involved in redistributing wealth) is very inept at allocating resources. Do you see the difference? Lots of dems don't. The later model (redistribution) was what we had under the 60s Dems leadership ... such as under Johnson. The former model (leveling the playing field) is what we had under FDR and Clinton.

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  22. bacon said...

    Nathan said: "I used to work for Fannie Mae. 15 years ago, they never hedged securities with swaptions, caps, floors, and other exotic instruments."

    dude, you're kidding right? you're using Fannie as a good example of financial innovation?

    I knew this response was coming. I should have covered this base initially. I assumed that everyone was knowledgeable about Fannie, Freddie, and the mortgage business in general. The products Fannie used are not in question. It is the practices of management that are in question. These instruments (pay fixed swaption, receive fixed swaptions, caps) are used by every major financial company in the world. For instance, it is the advent of these products that allow you to buy a home with no prepayment penalty. Fannie's main issues seem to be reporting and the executive bonuses that resulted.

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  23. nathan,

    You've threaded into the area of the bubblehead's conspiracist theory villains. It's the old story of "when you don't really understand what is going on around you, blame the people you are dealing with ... it's easier to just blame them than dealing with the complicated reality of the situation." You'll be talking all day and they still won't understand that without institutions such as Fannie Mae, they really wouldn't have a chance at home ownership. It would be like in countries like Costa Rica where the yes, the housing is relatively cheaper, but you gotta pay cash for it ... and that means only the very wealthy can buy. The vast majority remains renters for life ... generation after generation.

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  24. "It would be like in countries like Costa Rica where the yes, the housing is relatively cheaper, but you gotta pay cash for it ... and that means only the very wealthy can buy. The vast majority remains renters for life ... generation after generation."

    Excellent point, Lance. I would add to it that the GSE's were develepod after the loose lending debacle of the 1920's that contributed to mass bank failures during the 1930's. See, in the '20's, there was no such thing as "Interest Only" loans. What they used in those days were usually called "Balloon Mortgages." It was "different" then because you paid the, ahem, "interest only" for five or ten years and then the whole note came due at once. It was no where near as innovative in the 20's like now, where the I/O loan just re-amortizes after a given time at prevailing rates an the average homeowner's payment can like, triple.

    Thanks for posting - you are totally right about what happens when there is no credit available -I appreciate the enlightment.

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  25. help me out ANYONE ... does someone have a clue what dc_too is saying? I mean, what do loan terms have to do with their not being ANY loans available in countries that don't have institutions such as Fannie Mae around? Did I miss something, or is DC-Too so wound up in his own bubble that he re-interprets everything anyone says to somewho make it apply to interst only loans?

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  26. Lance,

    It's true that home prices (nominal values) have never fallen from one year to the next on a national basis. However, there are many cases where prices have fallen substantially in local markets from one year to the next.

    Also, we have had real value declines on a national scale on many occasions.

    Furthermore, the situation we are now in appears to be unique in history -- we have a large number of local markets in the US that have experienced extraordinary price increases in unison all inter-linked, many believe, by a global credit bubble.

    There's reason to suspect this could be the first time the US sees price declines on a national basis.

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