The analysis here is simple.
The Federal budget deficit is out of control. The CBO now estimates that by the year 2020 the Federal deficit will be NINETY PERCENT OF U.S. GDP. That is TEN TRILLION DOLLARS of new debt from just 2010-2020 and does not take into account all the new spending programs Mr. Obama and Ms. Pelosi are dreaming up over coffee in the Oval Office.
Inflation in March 2010 was at an 18-month high. The pressure growing on the Fed to monetize the massive Federal debt is obvious. Read this article from columnist Michael Kinsley on Mr. Obama's ideas for using inflation to pay down the national debt he caused during this first year in the White House. The worldwide risk of hyperinflation is growing and this fear factor on bond yields and long-term mortgage rates should not be ignored.
The demand for U.S. Treasuries is falling as Japan and China are no longer buying them at their usual rates. China is now a net seller of Treasuries. Buying is now at six-month low. Simply put, these nations have their own financial concerns and are not satisfied with the low rates on these bonds any longer. This factor alone has "dire consequences" for mortgage interest rates in the U.S. The artificial mortgage rate subsidy from China and Japan that gave Americans all those record low interest rates from 2000-2007 is now gone.
Mr. Bernanke at the Fed is going to have to start raising interest rates more sooner than later. Most estimates are between six to eighteen months, and once he starts they have nowhere to go but up. They have been stuck at near zero percent for far too long.
The near term outlook for U.S. real estate is grim. Too much supply, not enough demand, disappearing government incentives to buy, tight mortgage money, rising interest rates, high foreclosure rates still keeping down prices, and a hidden market of sellers desperate to unload properties but just waiting for any prices increases to do so.
Real estate investors have lost trillions of dollars in the last three years, and homeowners even more. There is no speculative incentive to buy most categories of properties anymore. Does anyone think they are going to get rich anytime soon buying and renting out condos? All the conventional buy-and-hold or buy-and-flip real estate profit models are obsolete and have failed investors miserably.
There are ways to play this gruesome market and I'll be discussing them in the weeks and months ahead.
Robert J. Abalos, Esq.