July 29, 2014 Real Estate Report - Why Are Rates Not Going Up?

After a good hike in long-term rates during the second half of 2013, just about every analyst in the country seemed to be sure that this was just the first phase of rate increases to come. After all, rates were the lowest in a generation and the increase we witnessed last year still put rates in very, very attractive territory. Jobs growth started accelerating during the second half of the year and the systems were ready to fire on all cylinders while the recovery finally got into full gear. Then came the long, cold and hard winter. So we understand that factor. Once again, the recovery halted and rates came down. But this factor has passed. Job growth has heated up again and the stock market is at all time highs. The Federal Reserve has been slowing their purchases of treasury bonds and home loans in an effort to slow down fiscal stimulus and they are meeting this week with most observers feeling that rate hikes will be coming in early 2015. The question remains, why aren't rates going up in response to all of these factors? We could take the easy way out by saying that predictions of the future are futile and while this is true, we believe there are other factors at work. Certainly one factor encompasses the political tensions around the world. Ukraine, Syria, Libya, Iraq and Gaza are all spots of conflict right now. The tragedy of a passenger jet being shot down just demonstrates how dangerous these situations are. When the world erupts, while our economy has not been as stable as we would like -- it is still a haven of safety compared to the rest of the world. When there is unrest, Treasuries are still a choice for those who are looking for safety in a world of conflict. While this factor does not completely explain why rates are not rising right now, there is no doubt that this factor is important and it also explains why predictions are futile. Next week, in addition to the analysis of the Fed meeting and the employment data, we will talk about one other factor contributing to low rates. Keith Stewart 773-529-7000

July 22, 2014 Real Estate Report - Do You Remember Inflation?

While some may consider this a sarcastic question...we have not had really high inflation in the United States for some time. For example, in the past twenty years the retail inflation rate has averaged approximately 2.25% with an even lower number for the past decade. Two points about this. First, even low inflation rates can cause increases in the cost of living. For example, a 2.25% inflation rate over 20 years will increase the cost of living over 50%. Secondly, though low inflation rates can create issues in the long run, those who are older remember a U.S. inflation rate of near 10% per year from the period of 1973 to 1982. That was real "old fashion" inflation. So if raging inflation has not been a problem for ten years, why bring it up now? Because the real reason we have had really, really low interest rates for the past ten years is the lack of inflation we have experienced. And if we really want to know when rates are going to go up significantly, we need to watch the data on inflation more closely. The reason rates trend up when we get good economic news is the fact that the markets feel that the Federal Reserve Board will raise short-term rates in response to the threat of inflation. There are actually two stages here. The Fed has kept short-term rates near zero in response to our deep financial crisis and lackluster recovery. So the first move is to move rates to a low inflation normal. The second move is the one we should worry about in the long-term. That is a move to head off inflationary expectations if the economy heats up. We expect the first move and should worry about the second move. For right now the sale on money to finance cars, houses and investments continues. If we keep creating jobs, we should keep a wary eye on the inflation number because we know the Fed is doing just that when they meet next week. Keith Stewart 773-529-7000

July 15, 2014 Real Estate Report - Still Work To Be Done

As the euphoria wears off in the aftermath of our stellar June employment release, we realize that there is still work to be done in order to fully recover from the financial crisis and deep recession. The recovery has been going on for five long-years, but it is still not fully mature. For example, while we have recovered all jobs lost during the recession, we have not added enough jobs to accommodate the population growth that has occurred during and since the recession. Even at today's increased pace of job growth, this void will not be filled for two years or longer. Furthermore, while the unemployment rate has dropped to 6.1% -- which was the lowest in almost six years, the "underemployment" rate still stands at 12.1%. The underemployment rate includes those who are working part-time because they can't find full time jobs. The labor participation rate stands at 62.8% which is a 36-year low. It is true that the baby boomer generation is reaching retirement age and this contributes to the labor participation statistic. On the other hand, it is not merely how many jobs are created -- it is also what type of jobs are created. America needs more high paying full-time jobs. So before we celebrate the end of bad times, we must understand that there is truly more work to accomplish. The fact that we have more room to grow is actually good news for right now because this gives the Federal Reserve Board latitude to keep interest rates lower for a longer period of time and not worry about the economy overheating. The markets will cause rates to rise as we witness the start of the cycle of better times. If this surge in job hiring spreads to the real estate markets, we will start making up ground in a hurry instead of the snail's pace of the past five years. If that happens, expect the Fed to act much more quickly. Keith Stewart 773-529-7000

July 8, 2014 Real Estate Report - Mid-Year Employment Reading

We hope that everyone enjoyed the 4th of July Holiday. There were plenty of fireworks during the weekend but the day before the holiday started the government provided their own fireworks with the release of a strong jobs report for the month of June. Most analysts were expecting a decent gain in jobs at just over 200,000 and for the unemployment to remain steady at 6.3%. The numbers were stronger than expected, especially when considering the fact that the previous months of jobs gains were revised upwards. In June the economy added 288,000 jobs which is robust by anyone's standards. The unemployment rate dipped to 6.1% and the decrease cannot be attributed to people leaving the workforce as the labor participation rate stayed steady. Though these numbers are subject to revision in later months, the fact that ADP released a similar number for private payroll growth the day before just confirmed the fact that the job market is indeed heating up. What does that mean? This is just what the doctor ordered for the economy. More jobs should translate into higher levels of consumer spending and especially spending on big ticket items such as cars, furniture and houses. A stronger housing market and automobile industry should create more jobs and the virtuous cycle will be created. If job creation continues at this pace, we should expect a pickup in interest rates and the growth in home prices should continue. We know we have said this before -- the combination of low rates and low housing prices will not last forever. While the stock market has been strong, rates have remained low. However, this news might just be the beginning of the end of the nation's sale on money. Keith Stewart 773-529-7000

July 1, 2014 Real Estate Report - The Oil Dilemma

If you read the analyst's projections, you get the impression that the price of oil should be falling because there is excess supply on the horizon. Demand is slowing in developed countries such as ours and new technology is helping us find oil where we have never gone before. "Tightening fuel efficiency standards for automobiles and changing consumer preferences look set to send U.S. gasoline demand back on the declining course on which it embarked in 2007," the Paris-based International Energy Agency said in its latest forecast published recently. Of course, this report can't predict political and other turmoil that occurs around the world. The conflict in Iraq has contributed to a spike in oil prices and because it heated up as the summer driving season was getting underway, there is a concern that gas prices will also spike. Gas price increases can affect consumer spending and with the economy recovering from the winter slowdown, the timing for price increases is not great. Although we are not sure that there is ever a good time for higher energy prices. Any data which could lead to a long-term increase in inflationary expectations can affect interest rates as well. In this case, the "long-term" projections from the International Energy Agency represent good news. In the short run we will always have to deal with interruptions in supply. Some of these may be caused by natural disasters which are never predictable. Remember, we are about to enter hurricane season. This week we will get a reading which will tell us how well we are recovering from the cold winter. The employment report is released early because of the 4th of July Holiday. We have some momentum in the employment sector and most are expecting this good news to continue at least moderately. Any surprise to the upside or downside could affect the stock and bond markets and thus the economy. What is interesting is the fact that this report will be released right before the holiday weekend. The markets are typically quiet during this summer holiday period but this week could be an exception. Keith Stewart 773-529-7000