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Volume 5, Issue 4 Nicholas French, Broker Associate, CRS

December 1, 2010

Quarterly Review
Watch Out for the Inflation Groundhog
Watch out for the inflation groundhog to show its ugly head. We are being told from the powers
at be not to fret about inflation because deflation is the real concern. According to the Fed, the
economy is teetering on the brink of deflation, and needs a jumpstart. The Consumer Price Index
is showing dangerously low levels of inflation, though they are not highlighting the dramatic in-
Nicholas French
crease to commodity prices. My concern, inflation is a nasty beast that can get out of control
Broker Associate, CRS very quickly when confidence
369 S. San Antonio Road increases and there is too much
Los Altos, CA 94022
new money (thanks again to the
Fed for the 600 billion of unnec-
650 773 8000 (cell)
essary fresh dollars). Inflation
650 947 2999 (office) data is at the lowest point since
650 947 3099 (fax) 1957, according to the CPI, re-
nick@realtornickfrench.com moving food and energy prices.
My concern is that I am seeing
www.realtornickfrench.com
commodity inflation (raw materi-
als such as cotton, wheat, oil,
etc.) that companies are not pass-
Inside this issue:
ing to the consumers yet; rather they are taking lower profits or offsetting the increased raw
costs through their internal cost cutting measures such as streamlining processes and headcount.
Watch Out for the 1
Inflation Groundhog Corporate profits are up on many industries (especially services and technology), but retailers are
starting to show signs of slower growth (Wal-Mart, etc). Profits have been up with cost cutting
If At First You Don’t 2
Succeed, Print Another
measures (labor, higher efficiencies – which is part of a market correction to cut the fat). Compa-
600 Billion nies that create goods with many raw materials are showing profits, but it is difficult to grow far-
If At First You Don’t 3 ther because of the dramatic increase in raw material prices: cotton, wheat, oil, etc. Corporate
Succeed, Print Another profits are up in many cases, but
600 Billion (cont)
they are not spending their cash
New Law Regarding 4 being cautious about the rebound
Short Sale Transactions
knowing their profits have been
Updated Neighborhood 4 driven by cost cutting, not end prod-
Statistics
uct sales profit. At some point these
companies will pass the increased
costs to the consumer. They are
also sitting on a ton of cash because
of low corporate confidence waiting
to see less uncertainty in the mar-
ket. Be prepared for the rise in everyday costs, wait, you’re probably already seeing that, but it
should get worse. If you have a moment visit my website (www.realtornickfrench.com) for a
great video that discusses these concerns in a very easy to follow, and comical way.
Quarterly Review
Page 2

If At First You Don’t Succeed, Print Another 600 Billion


I am sure by now you’ve heard about the new round of quantitative easing by the Fed. In their infinite wisdom they have de-
cided to print another 600 billion dollars to spur the economy. The rationale: the elite who control our money supply have
deflation concerns and say inflation is so low it is of no concern; the small print indicates they are calculating this data after
removing food and energy. I do not know about you, but I think the sky must be purple in their world. I look around and see a
fairly stable market, but to say we are not seeing higher prices just seems silly. Maybe they just do not see the bills or shop at
the grocery store, or pay for their gas or go outside – apparently living in a bubble clouds ones judgment. Even before this
latest injection of printed money into the economy we are seeing signs of an improving market. The real estate market has
stabilized in most of the country according to the latest statistics from the national and state sources; locally we are seeing a
push for higher end home purchases, albeit cash buyers and other savvy individuals who recognize good value buying homes
for equal to or less than replacement cost. Corporations are easing some on hiring and strategic planning and consumer confi-
dence for the coming quarters is improving. All this with double digit unemployment, but it will take several years at best to
get unemployment into a reasonable range; I have seen data suggesting at 400,000 new jobs added per month it will take ap-
proximately 3.2 years to reach a 5-6% healthy unemployment level. What do we have to remember: patience is a virtue and
there is no magic pill which will eliminate the time necessary for a market to correct, adapt and begin the cycle again.

Another argument by the Feb for the additional billions was to keep interest rates low to entice corporations to take advan-
tage of the cheap money and invest back into the market. The reality is that corporations are taking advantage of low rates,
refinancing existing debt and holding the cash while waiting for corporate confidence to increase – thank you Uncle Sam! They
are not spending on hiring, capital improvements or other immediate investments. Corporations recognize cash is king and
they are making strategic decisions whether to acquire competing companies or new product lines or research and develop-
ment. Once corporations see clarity in the market they will be aggressive about investing, so is the new printed money helping
the situation or setting up the US economy for some significant inflation once we get rolling – I’m going to bet on the latter.
But for consumers guess what a great hedge for inflation
is? (I will discuss this later). The Fed also says consumers
will take advantage of the low interest rates to refinance
their mortgages and new buyers will surge into the market.
Interest rates were at record lows before the Fed released
600 billion of fresh money, so they are counting on this
new release keeping rates low for some time. So what was
the reason for this new easing again? It’s ironic that the
corporations are refinancing into lower interest rates, but
the average homeowner that has a high mortgage rate is
unable to refinance to the market rate. Doing so would
save thousands of homeowners from going into default.
The media and government are making claims that borrowers should refinance into lower debt as if it were simple – appar-
ently the banks did not get the memo. According to Freddie Mac, at least half of mortgage holders still pay 5% or higher in
interest. I’m experiencing families selling their homes in distress that want to stay but unfortunately have high interest rates
that they cannot refinance because the equity is not there, but they make ample income to justify the expenses at the market
rate. Because of this scenario we are seeing those families sell the property, the bank and homeowner take the loss then the
property is resold to a new buyer that gets the low interest rate and has a great house that is affordable. The previous owner
typically goes into a rental with hopes of saving cash to buy again in the future. (cont page 3)
Volume 5, Issue 4
Page 3

If At First You Don’t Succeed, Print Another 600 Billion (cont)


(cont page 2) Amongst all the doomsday talk and media fear you do not hear many people talking about the amazing afforda-
bility, which is at a level I haven’t experienced. The low interest rates and price adjustments have created an environment that
I think is a real opportunity. I’m seeing families having the ability to buy an average home with relative ease. I’m seeing inves-
tors able to purchase rental and investment property covering the costs and possibly have positive cash flow. Previously, I was
constantly told these two scenarios could not exist in our area because of the high prices. Here is your chance, but the oppor-
tunity will not last indefinitely. At least once a week I am asked the question: when will the market rebound and prices in-
crease? My answer: watch the unemployment and interest rates. I am anxiously waiting to see whether the market will be
robust to handle significant interest rate hikes without prices stalling. Of course the cost of ownership will rise with interest
rates, so if prices remain the same when rates rise the affordability will decrease. I think the market will have to be growing
with confidence on the rise to handle the affordability adjustment. Now if prices rise and rates rise, well then the market is
definitely doing well. Either way I think the best bet is to purchase property with both low prices and low interest rates – guess
what, now is that opportunity, but is it the right time for you?

I asked the question earlier about hedging inflation for consumers – answer: real estate debt. In an inflationary market fixed
interest rate debt is your best friend. Imagine having future debt locked at 4.5% and banks are paying you 4% in your savings
account. That sounds like a great scenario to me. Furthermore, you will be paying down the future debt on cheaper money;
your million dollar loan after inflation will be significantly less if adjusted to today’s dollars. Let’s hope it is not so bad that we
are pushing wheel barrows of money to the corner store to buy bread and milk. Should everyone go out and buy real estate
tomorrow? No. Another funny state-
ment I hear especially from Realtors is
commenting on how they “should have
bought that house when it was low”,
but the reality is during the low markets
a few variables are typically true: 1)
money is tighter so you can’t afford it,
2) you may be scared just like your
neighbor and not willing to take the risk,
3) the extra effort and hoops you have
to jump through to make it happen may
be too frustrating to you. I think it is a
great opportunity for those ready and
willing to take the leap. Patience is a
virtue: the market isn’t jumping up dou-
ble digits tomorrow, so look and make
the right decision because realistically
you won’t be moving until the market
does rebound and you see some size-
able appreciation.

Please don’t forget if you are buying your home that is exactly what it is, a home, not an investment. Many people in the last
run forgot that their home was a home, a safe location, not an ATM machine or investment to refinance and go on vacation.
Buy a home to live in and if you have extra income look at investment opportunities.
Page 4 Nicholas French, Broker Associate, CRS

New Law Regarding Updated Neighborhood Statistics


Short Sale Transactions City Year Qtr No. of Closed % of List Median Average Average
Campbell 2010 Q3 64 98.20 667,500 707,401 66
Effective January 1, Campbell 2010 Q2 76 100.13 689,500 713,758 45
Campbell 2010 Q1 47 99.27 690,000 699,165 50
2011, Senate Bill 931
Campbell 2009 Q3 56 98.17 680,000 707,268 50
dictates if a first lender Cupertino 2010 Q3 103 99.04 1,090,000 1,113,362 33
Cupertino 2010 Q2 134 100.77 1,059,100 1,108,475 32
approves a short sales it Cupertino 2010 Q1 59 99.16 1,100,000 1,115,914 64
automatically acts as a Cupertino 2009 Q3 115 96.74 1,060,000 1,073,864 58
Los Altos 2010 Q3 89 96.96 1,565,000 1,707,914 47
waiver of the lender’s Los Altos 2010 Q2 98 98.21 1,500,000 1,636,253 41
right to collect the loan Los Altos 2010 Q1 63 97.29 1,521,500 1,682,069 73
Los Altos 2009 Q3 87 96.10 1,606,340 1,720,916 67
deficiency. In many Los Altos Hills 2010 Q3 25 93.61 2,500,000 2,835,825 97
situations a first lender Los Altos Hills 2010 Q2 19 94.63 2,400,000 2,618,800 115
Los Altos Hills 2010 Q1 12 93.66 2,061,000 2,229,291 121
currently maintains the Los Altos Hills 2009 Q3 19 92.69 2,255,000 2,226,688 79
right to pursue the bor- Los Gatos 2010 Q3 93 97.28 1,226,000 1,337,039 72
Los Gatos 2010 Q2 102 96.53 1,265,000 1,371,235 61
rower for loss on first Los Gatos 2010 Q1 49 96.21 1,002,500 1,289,080 87
trust deeds (mortgages). Los Gatos 2009 Q3 77 96.16 1,120,000 1,237,877 91
Menlo Park 2010 Q3 110 98.37 1,234,250 1,367,116 48
Many exceptions apply Menlo Park 2010 Q2 105 99.01 1,249,000 1,351,570 42
such as if there is fraud Menlo Park 2010 Q1 60 96.40 945,000 1,181,330 63
Menlo Park 2009 Q3 77 96.96 1,115,000 1,270,045 52
against the lender such Monte Sereno 2010 Q3 8 91.71 1,787,500 1,958,750 103
as an original stated- Monte Sereno 2010 Q2 13 96.73 1,755,000 2,030,129 93
Monte Sereno 2010 Q1 8 85.08 2,262,500 2,553,750 171
income loan, waste Monte Sereno 2009 Q3 12 92.53 1,782,000 2,100,818 105
against the property and Palo Alto 2010 Q3 119 101.26 1,385,000 1,555,295 35
Palo Alto 2010 Q2 123 99.91 1,468,000 1,681,872 36
cash outs. I am anxious Palo Alto 2010 Q1 72 98.33 1,436,785 1,564,192 65
to see how the lenders Palo Alto 2009 Q3 111 96.81 1,298,000 1,430,655 57
Saratoga 2010 Q3 77 95.93 1,650,000 1,795,243 70
will adjust to this change Saratoga 2010 Q2 110 97.0 1,499,000 1,618,118 61
and evaluate whether to Saratoga 2010 Q1 38 95.16 1,599,900 1,805,589 95
Saratoga 2009 Q3 88 95.40 1,402,000 1,601,718 104
approve/deny short Sunnyvale 2010 Q3 169 99.23 805,000 777,051 41
sales requests. Contact Sunnyvale 2010 Q2 177 100.95 851,000 815,204 43
Sunnyvale 2010 Q1 96 100.33 755,000 725,973 43
me directly for more in- Sunnyvale 2009 Q3 186 98.37 777,000 745,116 56
formation.