We must remember as we begin to discuss interest rates in greater detail that rates have a significant relationship with the strength of the stock market on any given day. The bond market (interest rates) has an inverse relationship with the stock market; as the stock market strengthens the bond market weakens (rates go up… get worse) and vice versa, as the stock market weakens the bond market strengthens (rates go down… get better). With this in mind, today was an overall slow day in the market as volume in both stocks and bonds were minimal throughout most of the afternoon. If anything, interest rates slightly improved towards the end of the day as trading began to slow while we await more economic news tomorrow.
Today’s major events included Federal Chairman Ben Bernanke testifying on the hill this morning as he continues to try and defend his position there is minimal risk of inflation in the coming years for our economy. If there is fear of inflation we will see intererst rates increase due to lack of confidence in the dollar. If Bernanke can keep the threat of inflation on the sidelines we will continue to see low interest rates, specifically for long term rates like a 30 year fixed mortgage. Another topic frequently being discussed recently has been about the commercial real estate market. The trends of the commercial real estate market typically lag between 12 and 18 months behind the residential real estate market. Meaning we are in for a rough road in the coming months regarding commercial real estate. With the overall increase in the unemployment rate we are seeing higher and higher vacancy rates in commercial offices. How does this impact the real estate community and possible lending programs? The main thing we need to consider when it comes to commercial real estate is the majority of these loans are funded by smaller local or regional banks. The bigger banks tend to shy away from most small commercial and construction lending because the local banks have been historically the most competitive players in this aspect of the industry. As more and more of these loans begin to default we can begin to prepare for our smaller local banks to begin a significant contraction in their lending portfolio. This can affect our real estate investors as well as our small businesses as these banks are typically at the forefront of helping these borrowers with customized or “creative” lending needs. Keep this in mind if you are working with real estate investors looking to purchase a few properties before the end of the year; their local lending sources could quickly be feeling a crunch of their own. There is also a possibilty our credit unions and smaller banks will place a freeze on their specific residential lending programs. Historically smaller banks have never played a significant role in residential lending with high dollar amounts. Reason being, most of them are portfolio lenders and need to have the asset base required in order maintain a strong leverage ratio in comparison to the debt on their books. This is why smaller banks typically have stronger loan programs when it comes to lines of credit, credit cards, auto loans, and second mortgages (when they still existed).
Lastly I wanted to share a quick video with you where Congressman Ron Paul of Texas takes a few minutes to recap all the government intervention in monetary policy since the beginning of the financial crisis in late 2008. When you take a step back and think of all the different programs and policies we have implemented you can only hope the right people are in place to make these decisions!
