If the state of today’s economy seems incomprehensible to you, you’re not alone. Nobody can make any sense of it. You can’t, I can’t, and even Janet Yellen can’t. The global economy has gone mad, and this madness is manifesting itself most potently in the financial and real estate markets. This, unfortunately, means every other sector of the economy will see the secondary effects of this insanity, and we won’t see any semblance of a healthy economy until order is restored.
Bill McAfee of Empire Title was back in the studio to explain what’s happening in the Colorado Springs and Denver real estate markets. Notably, he stated that he has not seen a real estate market quite like our present market since 1991. It is showing signs of both deep lethargy and robust health. The current number of active listings—2,429 in El Paso County—is the lowest since 2003. The velocity of sales, however, is at levels last seen in 2005 during the ramp-up to the housing bubble. There is a 12-year low in the number of houses presently on the market, yet they are moving as fast as they did during the bubble. In short, there are precious few homes on the market, yet they are selling very quickly.
The madness doesn’t end there. 10-year US Treasuries, to which mortgage interest rates are tied, have been on a roller coaster for years. Some months they’re skyrocketing to suggest the economy is roaring back to health; other months they collapse to near-historic lows. Their behavior is being driven by two factors.
First, Janet Yellen can’t make sense of the US economy, and investors can’t make sense of Janet Yellen. She suggested the Fed would start raising rates when unemployment hit 6.5%. It is presently at 5.5% and yet at her last press conference she intimated that rates would not be raised in the near future. Like all commodities, Treasuries have the future projections of investors baked into their price. The price depends on what investors expect to happen to them both now and in the future, and Yellen is giving no indication that rates, and therefore Treasury yields, will rise.
Second, turmoil in Europe is, again, driving investors to US Treasuries, which in the grand scheme of investment instruments are incredibly safe investments. Greece is talking out of both sides of its mouth while Germany is remaining intransigent to Greek demands to loosen the conditions of its bailout. Counties such as Sweden and Switzerland are abandoning their respective currencies’ pegs to the Euro since the cost of maintaining those pegs is enormous and only likely to get more expensive as the Euro becomes more volatile. This has caused the dollar to surge in value (many investors expect it to reach parity with the Euro this year) and European investors to seek safer refuge for their capital—which, presently, means parking it in the United States.
The smorgasbord of absurdity we’re seeing is likely to continue for years. Bad policy in the European Monetary Union, China, Russia, Japan, and, to a lesser extent, the United States is compounding with good policy on the part of Switzerland and, to a lesser extent again, the United States to wreak havoc on the global economy. Nobody can predict how the various entangled financial institutions of the world are going to act and react to each other’s moves. Until things settle down and return to some state of normalcy, we will continue to see such bizarre market conditions as we’re seeing in our local economy today.
3-21-15 Market Madness