August 26, 2014 Real Estate Report - Oil and Rates

There is an old saying which revolves around the fact that oil and water do not mix. But how about oil and interest rates -- do they mix? The truth is that oil prices and rates have gone lower in tandem this summer. There was a time when the economy could be stopped or started with a change in either energy prices or rates. However, today the effects are not as clear. For example, changes in gas prices don't seem to affect the consumer as much as they did decades ago. There are several reasons for this, but one important factor is the increase in energy efficiencies. On the other hand, the magnitude of the effect of interest rates does not seem to have lessened, but it is hard to tell with rates remaining so low for the past several years. For example, last year when interest rates started to rise, the real estate market responded by eventually slowing down. Again, the direct effect is not as clear as it always has been. For example, so many in America refinanced at record low rates in the past few years, the rise in rates not only slowed down the pace of refinancing, but also made homeowners more reticent to put their homes on the market. Why leave a home which has such a low mortgage payment? This phenomenon has contributed to a shortage of listings which has in turn contributed to the slowing down of the real estate recovery. Will the more recent decrease in rates reverse this trend? We really don't think that today's rates are high enough to keep people from selling their house. After all, rates are still close to as low as they have been in our lifetime. What will stimulate real estate is the continued generation of jobs which will increase household growth and a person's confidence to make a move. Job creation may actually cause rates to rise, but as long as the interest rate increases are marginal, they won't keep new households from purchasing their first home or renting a starter home. Meanwhile, lower gas prices and lower rates right now are good news for the economy and should be celebrated while they last. Keith Stewart - 773-529-7000

August 19, 2014 Real Estate Report - The World is in Focus

There is no doubt that the world has seen more than its share of conflicts this year. We have seen major conflicts in the Ukraine, Iraq, Gaza, Syria, Libya and more. With the amount of turmoil we have seen, the world markets have been pretty solid with our stock market being no exception. By mid-July, the Dow and the S&P were in record territory. In this column we even called it the "Teflon Market" because major news seemed to be shrugged off regularly. Could this time be different? The Ukrainian crisis has occupied the headlines pretty much all year. Yet, the downing of a civilian airliner has brought the conflict to center stage as many countries, including the U.S., have invoked economic sanctions against Russia because of it's actions in Ukraine. Russia has retaliated with sanctions of their own and now we have an economic cold war in the making. And the markets have reacted negatively to these escalating developments. Many times analysts have indicated that the stock market is due for a correction as it has been almost three years since the last real correction of at least 10%. Each time we have had a pullback in the past three years the markets have rebounded quickly and this past week we saw at least a moderate rebound. If the Russian crisis escalates, could we be in for a real correction? Only time will tell. However, there is some positive news which has arisen from the stock market's recent international malaise. Long-term rates and oil prices have both headed lower. At a time in which we are receiving positive news with regard to the economic recovery, lower rates and lower oil prices may serve to hasten economic growth. If economic growth accelerates, that is good news for stocks -- but possibly only if rates stay low. Keith Stewart - 773-529-7000

August 12, 2014 Real Estate Report - The Aftermath

We have had a week to consider the barrage of data released during the last week of the month and the first days of August. The markets were very volatile during this period with the Dow moving from record territory by mid-July to a 2.5% loss in one week and negative territory for the year as of August 1. Other markets moved as well during this period as oil moved down below $100 per barrel the same week and long-term interest rates were also volatile. Previously we asked why rates are staying so low if it looks like the economy is rebounding. As a matter of fact, one of the reasons the stock market reacted so negatively to the good news regarding the economy is that there was a concern the Federal Reserve Board might raise rates more rapidly than expected. The Fed even noted in its recent announcement that inflation was moving closer to their target numbers. We note that this was just one reason for the negative reaction in the stock market. There were others. For example, there continues to be plenty of political and financial turmoil overseas. Plus, with the Dow and S&P reaching record territory again and again in the first half of the year, the markets could have been due for a correction. Keep in mind that if the Fed does raise their benchmark rates, short-term rates will rise. But this is no guarantee that long-term rates will also rise. With international turmoil and plenty of negative economic news to balance the overall good reports we have seen, long-term rates are more likely to go up if the markets feel that the Fed is over-stimulating the economy. In other words, the Fed paring down the purchases of Treasuries and Mortgage Backed Securities and talking about raising rates can actually ease the concerns of the markets and keep long-term rates stable. At least for now. The Fed and the markets will be watching the real estate markets closely from here because this is the one area which has been weak and the economy is not likely to overheat while real estate sales continue to be sluggish. Keith Stewart 773-529-7000

August 5, 2014 Real Estate Report - Let's Add Up The Data

We very rarely get a week of economic data like the past week. We had a week of employment releases, culminating in the release of the employment report on Friday. We also had the Federal Reserve's Open Market Committee meeting last week. Add to that the release of personal income and spending data for June and for good measure add in the first estimate of the second quarter growth of the economy (GDP). It is tough to sum up all that data in a short amount of time and indeed it may take some time for the markets to fully absorb the data as well. But let's give it a shot by asking the general question -- how did we do? With regard to second quarter growth, the preliminary number released on Wednesday was strong. However, the 4.0% growth rate is subject to revision and it comes after a drop of 2.1 % in the first quarter due to the harsh winter we experienced. Taken together, the economy grew at less than a 1.0% rate during the first half of the year and economists expect faster growth during the second half, but not necessarily as strong as 4.0%. Meanwhile, the Fed's statement after their meeting contained no surprises as they continue to lessen stimulus by paring down on purchases of securities and were a bit more upbeat in their assessment of the economy which gave the markets the idea that a rate increase will still come down the road, but that "down the road" is probably closer than it has been. The big release was supposed to be the jobs report on Friday. Actually the numbers released were fairly tame. The 209,000 jobs created were close to expectations, but did not exceed expectations. Even the increase in the unemployment rate from 6.1% to 6.2% was not seen as bad news because more Americans were participating in the labor market which is a key component of confidence. The tame numbers served to calm the markets which fell precipitously on Thursday because of fears that if the positive GDP report was coupled with strong jobs growth, the Fed could raise rates even sooner than expected. Keith Stewart 773-529-7000