Four Forces - The Second Two

There are Four Forces that need to be considered in forecasting the real estate market.  Earlier we shared two of them.  Here are the other two.  For a more complete discussion and our forecast of the real estate market in 2010 and 2011, please download the presentation we made to the Board of a large community bank entitled "RE/set, RE/position and RE/start".

3.    Capitalism is quite simple:

The combination of low taxes + low interest rates + clearly understood rules = prosperity.  Unfortunately, today while we have low interest rates, our government is discussing raising taxes in a variety of manners and the rules are completely obscured by their other proposals.

4.    Magnitude of the Deflation Pressure:

This can be measured by the Trillions of Dollars spent in the stimulus to date without triggering inflation.  The devaluation is of the Dollar and is actually a result of the 1997 international bond crisis.  In 1997 the international bond market collapsed starting in Thailand.  As a result, most Asian countries devalued their currencies about 80% resulting in the products that they produced in 1997 costing $5 were being sold for $1 by the end of 1998.

While this benefited the American consumer, it obviously distorted the world economy on the manufacturing side and led to a lot of manufacturing jobs leaving the United States and moving to Asia.  Now the relationship between the various currencies of different countries of the world appears to be going back toward the ratios that existed in 1997.  The American dollar in the last several years has declined  by approximately half the amount necessary to get back to the 1997 level.

Devaluation ultimately will lead to inflation because imported goods will be more expensive in terms of the newly devalued dollar.  Because of the extreme amount of excess capacity in the manufacturing sector has been maintained by the various government stimulus bills as opposed to being eliminated, this excess capacity will act as a strong deflationary force.  It will probably keep a lid on inflation until 2012 to 2014 - when the world economy has recovered enough once again to use that capacity.