I hope this message finds you well during this festive time of year. I want to take this opportunity to discuss a few more thoughts on my mind with regards to the Real Estate Industry. In my last message, I was talking about the marketplace in general and where I see things headed. It will be interesting for you to monitor consumer spending this holiday season. Expectations indicate this season will not be as good as last year, however, Retailers think they have figured out how to control their inventory levels so they don’t run into problems they faced in recent years; racing to slash prices in order to unload excess inventory. An interesting and positive note to point out is that shopping right after Thanksgiving was reported up about 7.5% over last year’s “Black Friday” shopping spree.

The question one must ask is whether or not the Consumer has stayed in line with expectations. If consumer spending is off by more than expected, I believe troubled times will be evident as we sail into 2008. Oil prices are at record levels, the dollar is continuously weakening against the euro and worries about inflation have investors scratching their heads. The Fed has to take these concerns into consideration coupled with the troubled residential real estate market in the US and there are conflicting opinions with respect to interest rate movements. I would think the Fed will have to raise interest rates to respond to the inflation concerns, however, the real estate market would benefit from lower interest rates not to mention, Washington is already in discussion to perhaps freeze variable rate (and I do not even want to get into the potentially devastating effects this would have on our economy over the long term, but you can call me to chat about it) adjustments in order to prevent further disarray in the mortgage industry. Remember, the Fed can only control monetary policy through lowering or raising short-term interest rates. The open market will dictate long-term interest rates and if you watch the 10 year treasury, you will see what the market expects inflation to be over the next 10 years. If you have ever taken a basic finance course, you know that that the 10 year treasury is comprised of a real rate of return plus inflation. Research has shown the real rate of return to be approximately 1.41%, and the 10 year treasury as of December 4, 2007 is trading at 4.25% which means expected inflation over the next 10 years is expected to be around 2.84 based on my theory. Do you think the cost of living will only go up my merely 2.84% each year?

You may be asking yourself what all this means. I believe the cost of living exceeds 2.84% and I believe (as I did in my past message) that long-term interest rates will rise because of pressures I mentioned above amongst others; the market is going to take the position that inflation is going to increase by more than 2.84% and this will put pressure on long-term interest rates regardless of what the Fed does with short-term rates.

Next Month’s Issue: Further discussion on Real Estate; Is it a good time to Buy or Sell?

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