Helicopter Ben the Show

We were fortunate this week to have Bill McAfee of Empire Title on the show to help with a little mortgage and real estate-related housekeeping. As the owner of Colorado Springs’s largest title company, Bill’s well tuned into the local real estate market. On the show, he offered a mixed bag of news.
Consumer confidence is down significantly—a result of the recent uptick in interest rates and generally lackluster economic news that has persisted throughout the summer and fall. Housing inventory is at a 10-year low, suggesting new home construction has not increased significantly. However, because of this, home prices are up 4-5% year-over-year in the Colorado Springs area. This is great news for anyone who had hoped to refinance but whose equity was prohibitively low. It also presents a great investment opportunity, since very few investing instruments offer 4-5% returns at present.
Like me, Bill is concerned with effects next year’s Qualified Mortgage rules will have on the housing industry and the broader economy in general. New rules, such as limiting a borrower’s debt-to-income ratio or restricting the types of products lenders may offer and at what terms, will make borrowing more expensive and will prohibit many individuals from securing financing for their home.
Further complicating the near-term lending environment is the Federal Reserve’s recent spastic behavior. Several times over the last few months, the Treasuries and stock markets have skyrocketed and plummeted within moments of Ben Bernanke giving a speech, despite saying nothing of substance. Investors are trying to decipher Bernanke’s pronouncements and adjust their investing strategies accordingly, but it really has been like interpreting the ravings of a madman for clues about the future. In his most recent speech, Bernanke declared that the Fed’s QE program will soon end, but that the Fed will keep its foot on the gas until the economy improves.
Of the Fed’s two principle concerns—low inflation and full employment—Bernanke focuses far more strongly on inflation. As a student of history, he was and is determined to avoid mistakes made during the Great Depression that led to hyperinflation in Germany and severe deflation in the United States. His nickname, “Helicopter Ben,” derives from a speech he gave in 2002 in which he said that the government should use any means necessary to prevent deflation, even if it means throwing money out of helicopters to get it into the hands of people and, eventually, the broader economy.
The Fed’s QE program, however, was not intended to fight deflation; it was intended to boost aggregate demand in the economy by allowing the federal government to borrower and spend money without driving interest rates higher. Both Bernanke and his soon-to-be replacement, Janet Yellen, are Keynesians, and as Keynesians they believe low economic growth is fundamentally an issue of low consumer demand, and the surest way to boost demand is to spend money. On anything.
Since the QE program began, the Fed has created about $4 trillion and pumped it into the US economy. Of course, printing money doesn’t cause inflation per se. Two factors are necessary for inflation: Too many dollars chasing too few goods, and high velocity of money. Velocity is the frequency at which money in an economy is spent. At present, velocity is low. When the economy improves—whether that’s next year or, as I suspect, not until 2020—velocity will increase, and the economy will have at least $4 trillion extra dollars that must be absorbed by the economy. This will unquestionably create inflationary pressure in the economy.

The safest way to hedge against inflation is to invest in tangible assets, whether that means real estate or precious metals. The 4-5% returns presently being realized in real estate easily outpaces today’s low rates of inflation. This will likely continue as the economy improves and inflation and interest rates ticks up. So start preparing now. If you’re able to invest in real estate, now is the time to buy. If your current mortgage is interest-only or an adjustable rate, you need to seriously consider refinancing into a fixed-rate mortgage to lock in today’s low rates and prevent pricing shock as interest rates, and thus the cost of your loan, starts to increase.

Company NMLS ID # 1591 (www.nmlsconsumeraccess.org); CO–Mortgage Company Registration, Churchill Mortgage Corporation, 104 S Cascade Ave. Ste. 201A, Colorado Springs CO 80903-5102, Tel 888-562-6200, Regulated by the Division of Real Estate
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