Gas Prices And Change

The Bauman Society warns of the problems related to falling oil costs:

As you likely realize every time you pump gas into your car, the cost of fuel has dropped by about 50% over the last two years.

The Fall of Crude

See larger image

This is great news for consumers, but it’s bad news for the exploration companies extracting black gold from rocks and sand. 

And as bad as it is for those companies, it’s absolutely awful news for the states that have been collecting “severance” payments from all that oil being recovered. Oil provided a massive tax base for these states. Alaska, for example, made so much money from crude, it’s been known to pay residents an oil dividend every year.

This year, the governor said he’s going to give residents half as much as they received last year and cap the total payout to just $1,000. Yet this actually understates their problem: Alaska has a $4 billion hole to patch up thanks to lost oil-severance payments.

In an interview with MarketWatch, Alaska’s director of Office Management and Budget said: “We could close every school in the state and that still wouldn’t be enough to close the budget gap.”

While Alaska has the biggest problem, it’s not alone. Oklahoma and North Dakota each have a $1.3 billion deficit to fill. Louisiana’s is $2 billion.

So how will these budget gaps be rectified? By cutting spending and raising taxes, that’s how. That means more unemployment and less spending. In other words, these four states — which previously led the U.S. economy — will now become a drag.

That’s terrible news when the GDP of our nation is barely growing at a 1% clip. The last thing we need are more problems to hold back our economic potential.

And I’m afraid things are going to get worse before they get better. As James Dale Davidson and Charles DelValle have mentioned countless times, we are in the midst of a major shift in the global economy. The rules that were once considered “conventional wisdom” are fading away.

 All the various economies around the world are increasingly intertwining and becoming more complex. As author and historian Joseph Tainter pointed out in his book The Collapse of Complex Societies, the deeper the integration between these various economies, the more susceptible they become to a major problem.

So now, rather than wonder about what’s happening in the oil patch exclusively, we have to worry about what China’s future monetary policies will be … what Russia may do with its hoard of treasury bonds … or whether the European Union will splinter apart and push the entire globe into a new financial crisis.

We are heading full steam toward a collapse. And while we don’t have a crystal ball to tell us precisely when this will all take place, we do know that it’s inevitable. Because as every day goes by, we see more and more pieces falling apart.

All of which could mean big changes for the local real estate market...stay tuned!

Happy Investing! 

Sky is Falling

In the May 2016 issue of Esquire, author Ken Kurson states, "I believe that everything is going to shit."

The article is entitled "The End of the World: There's a storm coming. Batten down your money."

He has two major reasons for concern: 1) the Chinese economy, and 2) the global fall of oil prices.

He believes that China's economic figures were officially exaggerated. Swiss hedge fund owner/manager Felix Zulauf agrees that the situation in China is as worrisome as the 2007 US housing market. He is predicting a 15-30% decline in Chinese currency that will lead to a global recession.

The oil crisis impacts major oil countries, indeed, but keep in mind that in 2014, the US surpassed Saudi Arabia as the world's leading producer of oil. According to Kurson, the real crisis with oil prices declining is "the worldwide bank panic that is already slowly setting in as those who gave money to exploration projects start to realize they're never going to recoup their investments.

There are other indicators of economic decline. According to Bill Priest, CEO of Epoch Investment Partners, 56% of the S&P 500's 72% gain from 2012-2015 came from investors with more dollars to spend on price/earnings, due to the inflation from "quantitative easing" strategies of central banks. Fewer people are trading, more are trading on margins, and they are trading at a higher P/E ratio (the number of years it will take for a stock's earnings to pay back its price).

Formerly profitable companies like Apple are reporting declines in revenues. Bankruptcy filings in the retail sector are up, including A&P, Hancock Fabrics, and American Apparel, with others like Staples, Walmart, Sears, and Kmart closing stores. Default are also up in subprime auto loans.

Homeownership is at its lowest level since 1965. Yet prices are climbing back up, due to large volume purchases by buyers like Blackstone private hedge fund. Prices have not collapsed because interest rates are at an all-time low. What happens when interest rates get back to the normal 6-8% range? If rates went up to 7.5%, prices would have to drop 32% to maintain the same monthly payment.

James Dale Davidson warns that the 32% of the American population that are baby boomers will start retiring, and the spending and investing that generated income for the government will reverse, as boomers stop spending, start saving, and start collecting retirement funds from the government. This will have a big impact on government revenues, as boomers control 77% of the net worth in the country.

Kurson concludes, "With the second-largest economy in the world committed to artificially propping up an unstable currency while the most important commodity in the world experiences total collapse, things will get worse. And they might stay worse for a while..."

What do you think, dear Reader?

Happy Investing?

Seattle Real Estate Market

The number of new listings is increasing week over week (139 new listings last week); however pent up buyer demand from the lack of winter inventory is far out-pacing sellers right now.  The Seattle inventory count fell to 552 – 32 homes above our record low set a couple months ago. 

As you might expect with a white-hot market, buyer competition and escalation clauses are driving prices skyward.  We blasted through the $300 per foot mark a couple weeks back, and look to be at $325 per sq foot in the next week or so.  Thought:  If the cost to build new is about $125 per sq foot…eventually we’re going to get to a point where even fewer people are going to want to sell.  Instead of buying a move-up home, people will just tear down or renovate their current one – this will further decrease potential new inventory moving forward. 

Combine that thought of building new for about $125 per sq foot with Fannie Mae’s new guidelines a few months back where proposed rental income can be used to offset a current mortgage (thus, allowing current homeowners to keep their homes and buy another one instead of being forced to sell it); and I don’t see any inventory relief coming to Seattle anytime soon.  It’s beginning to look like a downward spiral for inventory…which should make builders happy, and the Seattle economy chugging along for quite some time.  

Mortgage interest rates were the victim of some pretty good news last week on the two fronts that have been driving them lower since the start of 2016 – 1) Oil prices rose, and are trading at $36.98 per barrel as I write this; and 2) domestic economic news was positive in the face of global turmoil. 

Oil prices continued rising last week despite an EIA reading of over 10m barrels added to inventories.  The reason:  US oil production is down (because so many oil rigs have had to shut down due to the low oil prices), and Venezuela may get shut out of the global oil market if they default on their debt…which it looks like they might.  There were conspiracy theories that Saudi Arabia has been driving down oil prices to kill off some of the weaker producers so that the price of oil would stabilize and remain high in the long run.  It looks like their hopes may be coming to fruition.  The price of oil has become an important topic as of the last few months.  The lower it goes, the more it hurts US companies and our economy.  When the price of oil falls, fears arise, and investors park their money in the mortgage bond thus lowering mortgage interest rates.  However, when the price of oil rises, economic fears lesson, and investors take their money out of the mortgage bond to invest is other higher risk/higher return assets.  This, in turn raises mortgage interest rates.

On the jobs front last week, the Bureau of Labor Statistics reported on Friday that US Payrolls increased by 242,000.  This was much higher than the forecast of 190,000.  Not only that, but unemployment is at 4.9%; the labor force participation rate increased to 62.9% (highest level in just over a year); and the employment-to-population ratio increased to 59.8% (the highest since April 2009).  This is great news for the US economy!  And surprising as well – People’s worst fears over what the fallout would be by lower oil prices putting oil workers out of work, and the slowdown in China have at least been quelled for now by this outstanding employment report. 

We’ll see what happens moving forward, but at least for now, sentiment is starting to change, and mortgage interest rates are starting to trend higher as a result.    

Today's blog courtesy of Kyle Berquist, Guild Mortgage Company

Happy Investing!