Too Much Money in the Banks! Where are the Loans?

As a government entity, the Federal Reserve is charged with protecting banks and their consumers.  They have 2 top priorities: stimulate job growth and monitor inflation.  Since the recession began in December 2007, the Fed has been working hard to stimulate the economy by offering low cost money to banks in hopes that it would be borrowed by businesses.  This was the plan - however, they are now holding more “excess reserves” and have been rapidly extending that number from $1.8 billion to $1,120 billion as of March 2010.



What does that mean for future interest rates and inflation?  Well, excess reserves are meant to be loaned to businesses in hopes that banks will, in turn, make a profit.  The alternative is to keep the money in the bank and earn a low amount of interest, typically ranging from 0 – 1/4 percent.  Essentially, excess reserves should be viewed as a mountain of credit!

So, why are the banks refusing to make loans?  The Saint Louis Federal Reserve offers two reasons:  1) they may view a risk free return of as much as 1/4 percent as the best investment; 2) they may want to hold onto these investments until they can “rebuild capital by cutting costs, raising fee income, and hoping for an economic recovery.”

Keeping all this in mind - once a spark ignites and the economy starts to recover, banks will start utilizing excess reserves and the unemployment rate will start to decrease.  At that point, the Federal Reserve will have to remain vigilant and monitor potential inflation.  There are many things that can go wrong with this scenario and the banks have a few “go to” options….

To read the full article, email info@oldhamrealestate.com.

Housing Market 2010 Recap

There are some big questions being raised about the sustainability of the government’s effort to stimulate the economy. Research Economist James P. Gaines outlines a real estate Market Recap for the first half of the year.

As written by James P. Gaines: 

The housing market seemed to show signs of improvement; however, during the second half of the year with no incentives it’s questionable as to whether the sudden growth will remain into 2011.

Existing single-family home sales for the first half of 2010 nationally were up 12.4 percent to just under 2.3 million units.  The increased pace of sales lowered the months inventory from 8.9 to 8.6, still a relatively high level during the months of March, April and May.  In June, sales fell a whopping 26.5 precent from July 2009, and the lower sales level caused the months inventory to soar to 11.9 months.

Like the U.S. housing market, Texas’ local housing markets felt the impact of the tax credit and aftermath of its withdrawal.  On a total year-to-date basis for the first 6 months of 2010, Texas home sales totaled 109,581, a healthy increase of 11.1 percent over the first half of 2009. 

It appears that Texas housing sales, like U.S. sales, peaked in May rather than the typical June or July cyclical high.  Sustaining momentum from the first half of the year into the second half may be difficult.

One potential explanation for the unexpectedly high number of properties listed for sale may be a marked increase in the number of foreclosed and bank-owned properties as well as short sales.  The continued softness in the overall economy and especially the job market continue to plague the housing sector.

Even with the significant sales decline in July, the July median price in Texas managed to increase 0.7 percent.  If October and November home sales do not show a substantial decline from 2009, the market may be indicating a significant and real recovery!