Fed, Focus! Beef Up That Dollar!

Doug Marshall
Market Assessment
Published June 19, 2008

The Federal Reserve, in continuing to focus on preventing recession and a greater economic downturn through interest rate-cutting, is now doing the American economy a disservice, according to Zaya Younan of Facts Matter.

Mr Younan, while applauding the aggressiveness with which the Fed has restrained the shadow of recession, points to the same rate-cutting done in the early months of 2008 as a primary reason for the current weak dollar and, not coincidentally, the rise in prices of commodities and inflation.

The U.S. dollar has taken a hard hit, dropping sharply to $1.5535 with the Euro (as of June 18, 2008), and will continue to fall unless the Fed takes off the rate brake and starts to increase them in an attempt to boost the battered greenback.

Until treasury rates come up and the dollar strengthens, Mr Younan sees inflation going further and creating the same recession that the Federal Reserve has sought so hard to avoid: consumer spending drops; commodities and gas prices jump; major corporations post deficit earnings; and economic growth goes negative.

While the Fed has announced that it will not be lowering rates further, it is imperative, says Mr Younan, that the Fed continue to play with and increase interest rates in an attempt to achieve equilibrium between diverting recession and dampening inflation.

Although we in commercial real estate wince at the prospect of higher interest rates it’s probably understood by all that such a move in this market will become more and more necessary. And the alternative (a devaluing of the dollar in relation to other currencies), at least according to Mr Younan, must be seen as even more unattractive.

Source:
Facts Matter by Zaya Younan, for GlobeSt.com, June 9, 2008

Credit Crunch: On To Recovery?

Jennifer Sinclair
Summary of Market Information
June 12, 2008

While some economists alternately warn of, and plead for, rising interest rates and many bank lenders seem to be retrenching and retreating from financing, the chief investment officer of one of the largest fund managers in the world, BlackRock, thinks that the worst of the credit crunch has passed.

However, in saying that “we’ve seen the worst of it in terms of crisis”, BlackRock Vice-Chairman Bob Doll admits that recovery will be slow, taking another two to four years to correct.

“There is still more to come,” said Mr Doll in Singapore recently, confessing that recovery from the bank-stability standpoint will be slow and other crises in credit card loan markets and auto loan markets, may slow growth even further.

The Federal Reserve is the hero, according to Mr Doll, with the bailout and provision for failing banks like Bear Stearns, ailing Washington Mutual (down 9.3% ), and pressurized Lehman Brothers (down 13.6%). “The point is policy-makers make bold, creative moves when the pressure is on…”, said Mr Doll, emphasizing the need for such measure to maintain the U.S. bank system.

While Mr Doll feels that the U.S. faces simple slower-than-normal economic growth, he admits that should gas prices and commodities prices continue to rise as they have, a full-blown American recession is likely.

Whether due to the end of a period of expansion or the beginning of 1970s-style stagflation, these indicators seem to be the ones to watch in assessing the future of the American economy.

Sources:
Financial Week, June 9, 2008
MSN Money, June 11, 2008

Interest Rate Cuts By The Federal Reserve Undercuts Inflation Fight

Doug Marshall
Market Assessment
Published June 3, 2008

The Federal Reserve has responded to the slowing economy by cutting the Federal Funds rate over the last several months. Has this produced the desired effect of spurring on the economy?

Analysts are saying it is having the opposite effect. It’s made things worse because inflation, according to the Consumer Price Index, has been zooming upwards in recent months. Inflation is expected to rise to 5.2% over the next year, a rate that hasn’t been seen since the late Carter and early Reagan administrations.

The Fed’s monetary policy has created real negative interest rates, where short term interest rates are below current inflation rates. The Fed hopes weak growth will cool inflation, yet it remains to be seen how long the Fed can maintain its present monetary policy without occasioning a spike in long-term inflation.

The Fed is belatedly realizing that it has helped turn smoldering inflation into a five-alarm fire, burning out of control. Consequently, they have signaled that they’re ready to abandon their policy of rate cuts.

Though short-term rates have come down in reaction to those early rate cuts, even those rates are looking to increase soon. One analyst (Mike Larson, http://www.moneyandmarkets.com/) feels that we’re more likely to see the Fed raising rates in the near future.

So what does that mean for your clients who need financing on their commercial properties?

1. The days of low interest rate loans are over. Ten years from now we will look back at 2006 and the first half of 2007 and realize just how good we had it.
2. You should be encouraging your clients to lock in rates as soon as possible, for as long a term as possible.

Sources:
Wells Fargo Commercial Mortgage Update, May 27, 2008
Mike Larson, www.moneyandmarkets.com, May 27, 2008

Bonds On The Ropes

Jennifer Sinclair
Summary of Market Information
May 9, 2008

In assessing how stocks, bonds, and treasuries are moving, the conclusion has been drawn that U.S. markets are headed down a tough road.

Bonds had, since June of last year, been trending upwards. Now, however, they seem to have peaked and, indeed, are moving frighteningly close to nasty falls and downward spirals.

Costs of mortgaging and other kinds of financing are in a position to get driven up, by spiking yields on Treasury notes. And, considering that the federal funds rate is yielding below inflation, real interest rates stand at negative values.

So, should inflation roar in, bond yields have the potential to soar, and even the conservative Federal Reserve is beginning to pay attention to that possibility. Kansas City Fed President Thomas Hoenig admitted that he is seeing “inflation psychology to an extent that he hasn’t seen since the 1970’s and early 1980’s.

So those looking to invest are advised to stay away from long-term bonds, a losing investment in an inflationary environment like this.

And for heaven’s sake lock the rates on any mortgage or borrowing instrument. Get financing for your project early and hang on to the interest rate, so that trying times don’t try your wallet.

Source:
Mike Larson, www.moneyandmarkets.com, May 9, 2008

Federal Reserve Credit Survey Results – Not Pretty

Doug Marshall
Market Assessment
Published May 21, 2008

In a survey taken quarterly by the Federal Reserve, some hard numbers get put to the trends seen in banks and their credit requirements for real estate funding.

A net tightening/loosening figure was placed on each sector and their lenders, reflecting an net tightening of credit by banks looking at loan requests, across markets.

The survey, titled “Senior Loan Officer Opinion Survey on Bank Lending Practices” for the second quarter of 2008, found that:

► A net 55.4% of lenders have tightened their standards on commercial and industrial loans to mid- and large-sized customers. At this time last year, banks were easing these requirements.
► On commercial real estate, a net 78.6% of lenders also tightened their standards. The first quarter of 2008 had the highest net increase in history; the second quarter, on which this number is based, comes in right behind.
► Residential mortgage numbers are even worse: 77.5% of lenders have tightened their standards in the sub-prime market. And even in the prime mortgage markets, 62.3% of lenders have tightened up. This is the highest increase, by a long shot, that the Fed has ever found in this sector.

The story told by these numbers is that lenders, who have been generous but not terribly discriminating in the past few years, are getting stingy with consumer, corporate, and commercial real estate funding. And in the consumer credit arena, even though demand has improved, supply just isn’t there.

Source:
Mike Larson, www.moneyandmarkets.com, May 9, 2008

Surging Credit Card Borrowing and Scary Implications

Jennifer Sinclair
Summary of Market Information
May 8, 2008

In a recent report on credit borrowing, it was found that consumer borrowing for auto loans, credit cards, and other non-real estate transactions has shot through the roof, by $15.3 billion.

The anticipated growth of credit borrowing by economists was $6 billion, so this comes as a surprise. This much borrowing, in a healthy economy, would signal a strong consumer increase in spending and more economic growth over time. But as we all know, this is not a health economy.

So what does this number mean? It means that consumers who are accustomed to taking out home equity loans and lines of credit, using them for vacations, boats, and other fun stuff, aren’t getting that money anymore. Banks aren’t willing to lend past equity and therefore have pulled the plug.

Instead, credit cards and other borrowings, for even day-to-day transactions have skyrocketed. Surging food and energy prices have forced consumers to rely on credit instead of ready cash. And this will weaken an already stumbling economy if allowed to persist.

Source:
Mike Larson, www.moneyandmarkets.com, May 8, 2008

Why Subprime Residential Lending Affects Commercial Real Estate Lending

Doug Marshall
Market Assessment
Published May 8, 2008

The question is persistently asked: why is commercial real estate financing suffering from the backlash caused by sub-prime residential lending?

CRE brokers and borrowers find little correlation between the two markets and therefore remain confused as to why the downturn in one is so affecting the other.

The reason pointed out by Dan Smith in the latest Commercial Mortgage Insight magazine is simple: the similarities in the two markets are driving them in the same direction more than their differences.

Basically, both markets syndicate and securitize their loans on Wall Street. The investor in securitized mortgage pools, for whatever reason, is not recognizing the major differences between the two lending markets: very lax underwriting in the subprime residential market compared to relatively tight-controlled underwriting for commercial lending.

More importantly, the delinquency rates for residential subprime loans are soaring compared to a very modest 0.3% for commercial loans. But it is the similarities between the markets now which is driving both toward the same depressed condition.

The market isn’t expected to stabilize for a couple of years, until new investor money comes into it, easing liquidity and injecting optimism.

But the impact has been minor for the second- and third tier lenders who seldom securitize their commercial real estate loans.

There is still plenty of money available for the smaller, “bread and butter” type of properties, albeit at more conservative rates and underwriting standards.

Source:
Commercial Mortgage Insight (May 2008)