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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: Elroy Jetson who wrote (15666)	11/13/2004 5:58:14 PM
From: mishedlo	Read Replies (1) of 116555

Real Estate - The Deflationary Catalyst comstockfunds.com Our regular readers know that we have concluded that real estate is the most logical catalyst for the deflationary environment we expect to unfold within the next 6 months to a year. We have also mentioned a collapse in the dollar or a major bankruptcy as potential catalysts, but real estate stands out in our minds as the prime candidate. This real estate comment is longer than normal and will serve as to replace the usual Tuesday and Thursday’s comments this week. The rush to refinance over the past few years is without precedent. According to ISI, the cash outs of the refi’s last year were in excess of $200 billion. One of the amazing aspects of the massive refinancing of homes, which is effectively piling on consumer debt at record levels, is the fact that this is being done with the blessings of our esteemed Federal Reserve Chairman, Alan Greenspan. In various testimonies he has stated that borrowing the equity in consumers homes is helping the economy and he supports it. Imagine the head of the Central Bank of the world’s largest economy becoming a cheerleader for individuals to continue borrowing on the equity of their homes while they have already incurred a record amount of debt and the homeowners’ equity is falling to record lows. Could the Fed Chairman actually think it is appropriate to use ones’ home as an ATM cash machine? Real estate bubbles bursting are different than stock markets bubbles bursting because bubbles in the stock market only effect the owners of stock and maybe a few brokerage firms that don’t adhere to strict margin requirements. A collapse in real estate, not only affects the borrower, but it also the lender. Over the past few years poor macro economic fundamentals have diminished the demand for commercial and industrial loans, causing commercial banks to seek other avenues of profit. In particular, the banking sector has increased its exposure to consumer, residential mortgage and commercial real estate (CRE) loans. The irony of banks currently fighting “tooth and nail” over generating loans to real estate is amazing since the spread between home prices and incomes are the widest ever, and the spread between the cost of owning a home to the cost of renting a home is the largest ever. The price versus rent in real estate is similar to the price-earnings ratio of common stocks and presently in RE this ratio is the highest level in history. This is where we were with stock market P/Es at the beginning of the century.

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