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How is bond market , real estate market connected?

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POSTED June 20, 2013 10:00 p.m.

Real Estate Boys: In today’s newspaper I read that the government is talking about not buying bonds anymore and the stock market crashes for the next two days.  In the same newspaper there is talk about home loan interest rates going up.  Can you Boys explain to me the correlation here?  The government buying bonds, interest rates going up and the stock market going down, does the government control them?  I would think that a strong stock market would mean wealth for the American investor, and then low interest means more home buyers, right?  Is all this stuff really tied together?  Do you Boys have any ideas?

— Hi and Lo

And now we enter the world of the “Twilight Zone.”  Rod Sterling had it pretty well spot on with the “Twilight Zone” comment.  While we profess  to having no degrees in economics or being experts in investing in the stock market, we do know this:  It’s a tangled mess and it is in the “Twilight Zone.”  Here’s what we understand:

Larry, thanks for allowing me to go first on this one.  Larry lets me be the lead dog when he feels sniper fire coming.  First, let’s take the politics out of this discussion.  The Democrats and Republicans, in my thinking, both want to do the right things to make the world a better place.  So, keep that in mind here.  Our government began buying bonds I believe four or five years ago with the idea that it would help prop up our tumbling economy.  Honestly, I think the people in D.C., even back in the Bush days, had no idea what to do to get the economy moving forward.  So, they had to try something, anything to see if it had an effect on the markets.  Hence, they began buying bonds.  Now what bonds they were buying I haven’t a clue. 

The feds spent billions on a weekly basis thinking that this purchase would show stability in the market and that even the U.S. government has confidence in the nation and the world economies.  Again, honestly, I have no idea if this worked.  Nonetheless, the Feds last week put the world on notice that they were considering, just considering, halting the bond purchases.  After just three days the stock market has dropped a little over 300 points in value.  It’s up to you, readers, to decide for yourself if the bond purchases helped to pull us out of the recession.  Lar, it’s your turn to drive this bus somewhere. 

Big thanks, Lloyd, and I like what you’ve said there. Let’s talk interest rates now.  Way back in the early 2000s there was a push to get people into owning their own house.  I think his name was Alan Greenspan and he thought if we lower interest rates, more people could buy homes.  Well, it worked, sort of anyway.  There was so much money sitting in banks that the bankers needed/wanted it out of their vaults and so they thought of new ways to loan money.  The new way was called NO-NOs.  Now, in this case no didn’t mean no like it does in my house.  NO-NO meant no qualifying for the loan.  Yep, the buyers just applied and got the loan.  The banks also did something called stated income.  I really love this one.  Stated means that when the buyers sat down with the lender and the lender asked how much the buyers made last year, the couple would look at each other and tell the lender $15,000 a month.   In most cases the lender knew the couple didn’t make that much working at the local catering truck but ‘OK’ was all that was said.  So, fast forward a few years and these loans were adjusting to the higher interest rates and the home owners’ monthly payment was going from $565 a month to $2,891 per month and the foreclosure market was born.  Rates were so low that the Feds were literally giving banks money to keep interest rates low.   Fast forward to May 29, 2013, and home values have risen about 30 percent since Christmas. The Feds feel we need to slow things down now so they will raise interest rates slowly as a braking mechanism.  Whether it works or backfires remains to be seen.  Honestly, let’s all hope whatever they do works.  Lloyd, you’re clean up today.  Hit one for the Babe.

OK, hitting cleanup is a big responsibility, so here goes team.  The Feds can play with their bond purchases and raise interest rates all they want, but what this nation needs big time is jobs.  But let’s keep it local for the close here. Valley towns like Turlock can’t support huge prices like we had back in 2005 and ‘06.  Our local economy simply can’t pay enough per hour to support those prices again.  But, Turlock and the surrounding communities are starting to get some good stable companies to move here.  Companies like Blue Diamond and Amazon will help our economy hugely with over 3,000 jobs in the future.  We’ll need more jobs like Amazon and Blue Diamond, but I think they’ll come.  If the housing market is to grow, so must our job base.  If the job base is stable then the housing base will also be stable.  Finally, as Turlock goes so goes America.  How’s that Lar? 

Did real good, Lloyd.  You’re a Diamond in the rough sir.  Just in closing now, Hi & Lo, the answer to your question does the government control the stock market and the interest rates:  I think the answer is a resounding you betcha.  Yes, the government controls the economy much more than we want to admit.  Think about when Ben Bernanke, the Federal Reserve chief, speaks how our Dow Jones Industrials (stock market) goes up or down with a moment’s notice.  Think about how much gold we are holding in reserves and the amount of oil we have in underground reserves.  Yeah, our government controls the economy.  Our hope is that the person running the economy knows what to do next.  Over the last six years it’s been hit and misses but now maybe that person is in on familiar ground and knows what to do next. Thanks for the question Lo & Hi.

— A little about us, Lloyd is a retired farmer of 27 years and a realtor for about 10 years.  Lloyd is an active member of the Central Valley Association of Realtors and sits on the CVAR Board of Directors.  Lloyd is a long time member of CVAR’s Master Club for his sales production.   

Larry has been involved in Turlock real estate for 30 years and has been a broker for almost 27 years.  He is also active in CVAR activities and is a past president of CVAR.  If you have questions please call Lloyd at 531-4853 or Larry at 484-4216.  E-mail questions for future columns to: lrblackman@earthlink.net or lndrumbeck@aol.com.

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