The Physcology of Recession will Tank Las Vegas… or will it?

Posted on February 28th, 2008

Warren Buffet wearing a suit and looking to the right Warren Buffet is famous for saying that the “herd mentality” controls the markets and that the markets can be controlled as much by emotion as anything else and the belief that we are heading into a recession could quite easily be yet another example. If people think the Las Vegas market is ailing, it will likely fall in the short term. Fortunately, this mentality can be quickly overturned by the fundamental factors that influence the local economy and markets. So, will the Las Vegas local economy really tank due to a US recession? Read on…

The price of goods and services are only applicable as long as people believe that whatever they are buying is worth what they are paying. The laws of supply and demand certainly apply and when people perceive money to be on sale, as when the Fed cut rates from 2001 until 2004, they began the herd euphoria of “Mr. Market” as Buffet so aptly describes it. This in turn drove up the price of real estate and just about everything else as people suddenly came upon piles of equity that were created from thin air. By the time the Fed realized that they may have gone too far (as Alan Greenspan stated in his recent book “The Age of Turbulence”) they immediately increased the Federal Funds Rate. The Fed then increased the Federal Funds Rate 17 times in row and in affect has helped push the country into recession.

This is where fear comes in.

The Federal Reseve Bank
The central bankers at the Fed understand the market mentality and the corresponding euphoria and panic that can go along with it; which may be the reason they stated in the New York Times this past November that we are NOT heading into a recession. The markets tend to place more credence in the words of the Fed and the analysis of the delivery of those words than just about any other market indicator out there. The Fed understands that emotion and perception have as much to do with the markets as anything. The current Fed chairman, Ben Bernanke, and his predecessor, Alan Greenspan, both like to use the term “resiliency of the market” to describe their strong belief in our economy. This term is used whenever people express fears that our country is in a financial tailspin. Greenspan made the point that the markets were hardly affected after 9/11 and recovered brilliantly after the tech fiasco in the early part of the decade. Some of this can be directly attributed to Greenspan’s actions and the other can be attributed to the way the business world reacted to his statements as though he were a fortune teller.

For the markets, perception is reality. The Fed not only controls the flow of cash but is magnanimously capable of pushing the mentality of the markets. Baron Rothschild famously stated “Give me control over a nation’s money supply, and I care not who makes its laws.” Woodrow Wilson apparently understood all this after he signed the law creating the Fed in 1913 when he stated in his autobiography that his biggest regret was allowing the creation of the Fed.

Most people are unaware that the Federal Reserve is not a government body. The President appoints the President of the Fed, who is usually (although not necessarily) also the President of the FOMC or Federal Open Market Committee (the body that determines monetary policy in this country). Technically, the U.S. President’s only job or responsibility under the law is to appoint the President of the Fed. However, there is to be a separation of the Fed and our government, and be that as it may, the close relationship between the Fed and our government is obvious.

I say all this to make the point that those who control the money supply in our country have a great degree of control over the mentality of the markets and the economic mind of the population. If people perceive that money can not be borrowed or obtained as easily, or that the price of real estate or stocks are dropping they are less likely to jump into the market. This of course puts a cap on inflation. Those who are smart like Warren Buffet love times like this because they consider everything to be on sale. The United States is a country that is not going to dwindle away to nothing. More specifically, Las Vegas is a city that is growing at a fevering pace. We have over $40 billion dollars worth of construction currently in process on the Las Vegas Strip. This is equal to the total amount of construction that has been spent on the Las Vegas Strip thus far! Opportunity is abound for those savvy enough to see it. Rental rates are already on the rise in the valley and renters are increasing due to foreclosures and home buying slowdowns. All of this provides an opportunity of epic proportions for the affluent few to buy real estate and businesses at historic discounts.

There is a window of time associated with these opportunities that is winding down. Even with a United State recession likely, Las Vegas will continue to grow in terms of jobs and a housing shortage in 2009 based on our current migratory influx of new residents. Recession or not, the local economy is poised to boom in 2009 and on.

Many green investors fall into the trap of personally feeling the emotional cycles of the market which often resemble an unstable person in which the cycle flips from exuberant to despair. Savvy investors instead, logically analyze the market factors, cash flows and profitability of their investments instead of concerning themselves with the feelings of joy or pain the markets bring. The facts are that real estate values in many parts of the city are offered at 2001 price levels, foreclosed properties are currently experiencing multiple investor offers and rents are appreciating. These are all exceptional signals for Las Vegas investors to take a look at the market and determine if the time to act is now.

Call or e-mail me with your questions and comments on the real estate market. As an avid investor myself, I love discussing the opportunities at hand. You may also leave comments below.

Timothy Hartman / Luxury Financier
Luxury Mortgage Group
Direct: 702-370-0105
Timothy@LuxuryMortgageGroup.com

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Filed under Federal Reserve (FED), Las Vegas Mortgage, Physcology of Recession, herd mentality, investor sentiment, las vegas fundamentals, las vegas real estate, real estate market | No Comments »

Presidential Candidates Offer Opposing Views on the Ailing Housing Market

Posted on February 8th, 2008

        There is not much debate at this time about whether or not certain segments of the housing market are in fact in a crisis, but rather the real issue is how we deal with our current situation. Some advocate letting the free markets play themselves out with little government intervention. Ron Paul, the conservative Republican, is perhaps the strongest proponent of this. Ron Paul predicted the subprime mess before it happened laying blame on the Fed for causing the “marginal buyers to get off the sidelines when they may not have known what they got themselves into.” Paul does not support the increase in relaxation of guidelines in such programs such as the FHA programs and Fannie Mae guidelines. As you may be aware, President Bush has been pushing for increases in FHA and Fannie Mae loan limits as well as proposing a freeze on current ARM rates for buyers who have been making their payments on time at the introductory rate, but may have difficulties once their rates reset. His economically sound central argument places the ultimate blame on the Federal Reserve, saying that their unprecedented rate cuts to 1% was the creation of unhealthy exuberance for borrowers, thereby creating this mess we are in.
        On the democratic side, Hillary Clinton supports a freeze on interest rates for current homeowners and also a freeze on foreclosures for 90 days. While some may argue that this might inject additional liquidity into the economy by allowing these homeowners to spend more free cash, others such as those in publications like Fortune magazine have argued that Hillary’s buzzsaw plan could cause a massive increase in long-term rates for future home buyers. With Hillaries plan, bond investors, already uncertain about reinvesting in mortgage-backed securities would scatter to find other financial instruments to park their money. This would cause a huge long term hike in rates and be highly detrimental to affluent borrowers.
        Barrack Obama sees a much different root problem and solution to it. His answer is for more accountability in the real estate industry itself. Obama plans to go after the lenders, banks, loan officers and realtors who may have misled buyers as far as the programs that they were getting themselves into. He proposes increased penalties and tightening of guidelines for predatory lending, and does not necessarily believe that direct government intervention other than tax breaks for middle-class homeowners is necessary. While this is a great idea in and of itself, I do not believe that Obama has gotten to the root of the problem in his solution.
        Those who believe in free-market economics obviously are in support of letting the markets work themselves out. I would consider myself to lean more in this direction, although I do believe that some government protection of the industry must happen as there is plenty of room for fraud and manipulation of fees and buyers as the current guidelines now stand. We are seeing some of this happen already, specifically in Nevada and other states as loan officers are becoming directly responsible for making sure that stated income or non-verified income loans are reasonable and justified. This shifts the responsibility more on to the lending institutions and less on the borrowers.
        I would, however, strongly encourage fully-verified income buyers to take advantage of the continued low level of long-term interest rates and strength of the mortgage bond market. This situation may not last long as we are likely heading for a recession. Mortgage bonds as well as the entire financial industry has the chance of pushing bond prices lower and then in turn, mortgage rates higher, so your timing is critical. ?
        The other current good news is that Fannie Mae is looking at increasing conventional loan amounts to somewhere in the range of $600,000-$700,000, where the previous limit was $417,000. This means that jumbo loan limits are pushed higher and will allow the lower conventional rates to be applied up to these new higher loan limits. This will help savvy borrowers looking to finance new properties at deeply discounted interest rates. However, you must act quickly, as this situation is precarious and has the potential to evaporate quickly. Contact me if you have any questions on luxury financing or the current status of the housing market nationally or specifically in Nevada. I look forward to serving you and providing you with your best options available.