Weekly Observation for November 13, 2010 All Real Estate is Local Just Like Politics
November 13th, 2010The topic of of economic uncertainty is common throughout the media and on this program the past year, especially since Obamacare was passed along with Financial Regulation reform. Adding to the uncertainty are the Bush tax cuts that are set to expire at the end of this year.
What is the importance of this uncertainty? It is the reason we are not seeing an economic recovery. Businesses cannot plan a budget when they don’t know what their costs will be regarding health care, financial transactions, and taxes. Hence no hiring and a historically long period of high unemployment.
Uncertainty is felt by families as well. Concern about losing their job. A health care bill that promised to lower insurance costs failed and premiums are rising. For the past couple weeks families have watched helplessly as the price of gas exceeded $3 a gallon, and the grocery bill went up.
No wonder people aren’t spending which accounts for 70% of our economic activity. There’s no better example than in housing. Home sales have fallen 32% locally since July 1 when home buyer tax credits ended at a time interest rates have been the lowest in decades. The super low interest rates are the saving grace for the housing market. Just imagine where sales would be if rates were higher?
It may not be too far into the future before we know that answer. With the Obama administrations economic policies failing to create jobs and economic recovery the Federal Reserve felt compelled to take action and announced a program called quantitative easing. Chairman Bernanke admits this will cause inflation. Seems to me Bernanke is willing to risk long term pain for short term gain, and it is questionable if will will even get short term gain.
Since the financial meltdown in 2008 the Federal Reserve has increased the money supply 300% with their initial $1.7 trillion quantitative easing. This does not include Tarp, Stimulus, or massive omnibus and budget bills. This gives me a sick feeling in the pit of my stomach.
Why would I have such a feeling. I lived through the 1970’s and 80’s when interest rates went above 20%. I’ve read Milton Friedman’s book Money Mischief that provides evidence when you increase the money supply without the corresponding increase in demand for goods and services inflation is unavoidable.
We’ve all read the reports that there is $1.5 trillion dollars sitting on the sidelines in banks and businesses not being spent due to uncertainty? Now the Federal Reserve is going to double down and pump another $600 billion into the economy with money printed out of thin air?
I also reported here that half of the leading economists in an AP survey don’t believe the quantitative easing will produce the intended results. Trying to lower interest rates below already super low rates to get people to spend, banks to lend, and businesses to hire. They say it’s like pushing on a string. My question is how does quantitative easing address the three major components creating this economic uncertainty? Obamacare, FinReg, and taxes. It doesn’t.
I don’t believe this is going to turn out well for the country. Maybe all this is above my pay grade so I’ve invited Dr. Lawrence Yun Economist for the 1.3 million member National Association of Realtors to appear on Let’s Talk Real Estate today. We will learn Dr. Yun’s opinion regarding economic uncertainty, quantitative easing, inflation potential, and his outlook heading into 2011.
The one thing I do know is that all real estate is local just as in politics. After struggling through the past couple of years it looks like some silver linings in the clouds are visible for the Springfield area. The development of Legacy Pointe with the anchor store by Scheels being completed next summer creating 300 jobs. The expansion of medical facilities with St. John’s hospital leading the way with a $192 million renovation and expansion of the main hospital and construction of satellite facilities will create construction jobs now, and medical jobs later.
This is important because jobs are the key to economic recovery. For what other reason would Springfield experience lackluster home sales? Interest rates as low as you’ve seen in your lifetime and in a year when there were tax credits to buy a home, Springfield will be lucky to have as many home sales as in 2008 when we had the financial meltdown! It has to be jobs. The lack of jobs means we haven’t been able to replenish the buyer pool to absorb the inventory of homes for sale, or to spark meaningful numbers of new home sales.
The economy cannot recover until the housing market recovers. There is no other industry that has as many ancillary industries dependent upon it than housing. Sales of homes both existing and new means jobs. Jobs means more buyers, and more homes sold means more jobs for the industries tied to housing.
My greatest concern today is that locally we are posturing for a rebound which could all be sidetracked unless our state and federal governments don’t change course away from policies that have subdued economic activity, and actually prevented the recovery for which the policies were intended.
I’ve always hoped I was wrong about my intuition when TARP was passed, followed by bailouts, takeovers, Stimulus, Omnibus, deficits, bloated budgets, Obamacare, and then FinReg. To date all those concerns have proven well founded.
Although Springfield is the capitol city we can’t count on a bankrupt state government in the near future to help create jobs. In fact the opposite may be true. If taxes are increased on businesses and families on top of already increasing costs of living for necessities, consumer spending will tank. We know that results in the loss of jobs and will cause out migration from the state to increase.
We are already number three in out migration behind only California and New York. Two other states that have tried to tax their way to prosperity. The state will be more of a burden than help to the local economy. Unlike the federal government where the tax and spend liberals in congress were overwhelmingly defeated, the Illinois voter returned most of the same people to continue to run the asylum. Where is the evidence that will improve the state’s economy?
Winston Churchill said; A country trying to tax its way to prosperity is like a man standing in a bucket trying to lift himself by the handle.
If economists say a country can’t devalue its way to prosperity, then in my opinion quantitative easing is like a man attempting to remodel his home using fire.
I am looking forward to visiting with Dr. Yun. We could use some good news, and I hope he has some. All real estate is local, and we have some very positive signs we are poised for a rebound. The only thing standing in our way is the government, both state and federal. It will be interesting to watch events unfold as we march into 2011.
The opinions expressed here are solely those of Fritz Pfister or identified sources, and not necessarily those of RE/MAX Professionals of Springfield or RE/MAX International.
