Market Report: June 2005

The Chairman Sends a Warning by Jim Scott

Veterans of the stock market implosion in the early part of the decade must have experienced a sense of déjà vu last March. For those who were not around during the heady days of the stock market boom, Alan Greenspan, then and now the chair of the Federal Reserve Board, complained about the “irrational exuberance” of the financial markets. We all know what happened next.

Now the Chair of the Federal Reserve Board has taken aim at what he considers excessive speculation in real estate. His twin concerns seem to be certain cities where prices are very distorted and the speculative bubble in second homes. Mr. Greenspan’s misgivings could lead to more of the traditional Fed cure for actual or perceived financial misbehavior, higher interest rates. The Fed’s meeting of May3rd made it clear more hikes are in the works.

The eight Fed increases have not tamped down housing demand. The Chair spoke of the “conundrum” of mortgage (long term) rates not responding to the Fed medicine. As long as the Chinese keep selling us toys and buying U.S. debt with the profits, low long term rates will frustrate Mr. Greenspan. Their demand for bonds drives down yields and keeps your payments low.

Mr. Greenspan’s remarks were well parsed as always. He knows he has limited means to force market corrections in those errant cities. Of course, San Diego and most of the California was on his hit list of real estate markets that have gone up too far and too fast.

The rush for ski condos and other vacation real estate can create future problems for the local market. The red-hot second home market could be the bell weather of a coming correction—those prices have risen rapidly because people have too much disposable income and too much borrowing power. What is a concern is that instead of reducing debt, people are borrowing more to enhance their lifestyle. The heady brew of real estate leverage is hard to resist when prices have upward momentum.

I have also seen the same forces at work in the collector car market. Those prices have now outstripped their old market peak, which occurred in—of course—1990. Sound familiar? When cash or borrowing power gets short, the Ferrari and the ski condo are the first to be thrown to the sharks. The Chair is rightly concerned about a domino effect created by excessive borrowing and speculation. 

Dead Air

I see this market as akin to the conditions early sailors faced when crossing the ocean. Early mariners could encounter days or even weeks of ‘dead air’. Ships would drift aimlessly pushed here and there pushed by the whims of the ocean’s currents.  There was little to do but wait for the wind to pick up. I am sure it was both boring and discouraging—but at least the ship did not sink. I see some signs of prices going south, small leaks in the hull. But this ship is not going to sink. I think it will reside in dead air for some period, perhaps even into next spring. Prices and sales will be lackluster at best.

Certain parts of the market are over supplied and most of it is overpriced. It will take a moderate correction or more cheap mortgages to reignite this market. At the moment sellers are loath to take that step. I think Mr. Greenspan will welcome the respite.

Carl Mortensen

It is with sadness and regret that I must note the recent passing of one of our own at Scott & Quinn. Carl worked at our Mission Hills office with his wife Lisa. He was the archetypical hardy Norwegian. Solid, reliable, a guy you could trust. He was not flashy but had a sharp wit and keen observational powers when it came to humankind’s foibles. Always cheerful in the office, Carl used to amuse me most on those rare occasions when he came close to losing his temper. Someone’s absurd behavior was generally the trigger that would set him off. In any case, I always listened and left with a chuckle.

Carl was always ready with a favor if you needed it. I am a real believer in the Favor Bank and I am sure at some level I still owe, but I know he would never hold it against me.  I guess I owe Lisa a few favors.

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