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Flailing Money Markets Power Today’s Real Estate Prices

Flailing Money Markets Power Today's Real Estate PricesIf you’ve looked at mortgage rates recently you might have noticed something interesting, money markets worldwide are making real estate financing costs lower than they were at the end of 2016. Not very much lower, but lower.

As far as anybody knows the Federal Reserve is still poised to raise bank rates higher at several points during the coming year. And while the Fed does not directly set mortgage rates the usual thinking is that higher bank rates certainly influence the costs of real estate financing.

The problem with this theory is that it lacks consistency. For example, at the end of 2015 the Fed raised the Federal Funds rate by .25 percent and mortgage rates proceeded to fall for the first six months of 2016.

As to the economic policies of the new Administration it’s entirely unclear what will happen. Reuters quotes Federal Reserve Vice Chair Stanley Fischer as saying there is “significant uncertainty” as we look ahead.

Finally, a Fed forecast which makes sense.

Not only have we not figured out why mortgage rates rise or fall we also don’t seem to know too much about real estate pricing.

Sure, we have some things to say about supply and demand and in the general case such thinking has proven broadly reliable, but when it comes to specific situations the jury is still out. For example, the National Association of Realtors says that in the fourth quarter home prices rose in 158 out of 178 metropolitan statistical areas. They also fell in 20 areas. If you’re in one of the 20 metro areas where values declined you’re probably still waiting for the good times to roll.


The barrier which prevents even higher real estate values, we are told, is the lack of inventory. There just aren’t enough houses to sell.

This is a curious idea. If we think of listings as “supply” then doesn’t it follow if we increase the number of homes for sale that real estate pricing will either slow or decline? If we have more pears don’t pear prices drop at the supermarket?

The truth is that as we continue into 2017 we are looking at a real estate market which is fuzzy and unclear. If mortgage rates rise that surely is not good for real estate sales. The claim is made that the economy is improving but the reality is that the typical workweek is now just 34.4 hours according to the Bureau of Labor Statistics. That’s not 40 hours per week. No wonder household incomes continue to lag behind 1999.

The reason the real estate marketplace is successful today — the reason real estate buyers can buy and sellers can get better and better prices — is that the money markets are in disarray. Worldwide, there are trillions of dollars invested with negative interest rates. Investors can’t give the stuff away.

“Global yields,” tweeted Janus Capital last summer, quoting famous investor Bill Gross, are at their “lowest in 500 years of recorded history. $10 trillion of neg. rate bonds. This is a supernova that will explode one day.”

Keep your eye on mortgage rates. There’s little reason for them to go up and trillions of reasons for them to stay where they are. Or even fall.

(Photo courtesy of Wesley Tingey)

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