QE3 is the Federal Reserve Bank's recently announced initiative to buy $40 billion of mortgage backed securities per month indefinitely until the economy improves. The main goals of QE3 are to (i) improve the housing market by decreasing mortgage rates and boosting housing demand (ii) stimulate the economy by pumping money into the financial system. The Fed hopes this would spur business investment and hiring.
Sales in the third quarter of 2012 was up 9.3% compared to last year. This is also the highest sales pace since the third quarter of 2008 when a financial crisis was triggered by the collapse of Lehman Brothers.
Bloomberg reported today that Goldman Sachs' CEO Lloyd Blankfein is long real estate amid anti-deflation actions by central banks globally. Given that asset prices are expected to increase, Blankfein said,"I accept that invitation to have higher asset prices, and so I would go long more the real assets."
Manhattan condo prices continue to increase as supply is at the lowest level in years, according to Crains New York. 432 Park Avenue, which will be the city's tallest residential tower, is now increasing average asking price to $5,800 per square foot. This is three years before scheduled completion.
1. From 1912 to 2012, stocks had a real return of 6.6 percent per year and this is fading. This 6.6% return will be hard to replicate in the future because two drivers that contributed to corporate profits are already at historical lows (i) labor costs (ii) corporate taxes. Bond returns are fading as well. The Barclays U.S. Aggregate Bond Index currently yields only 1.8%.
2. Today, a diversified portfolio comprising stocks returning a nominal 4% and bonds returning a nominal 2% may produce an aggregate portfolio return of 3%. After inflation, it becomes zero. Bill Gross goes on to say that assumptions of 5-6% real returns used by portfolio and pension fund managers are unrealistic. Realizing this, policymakers' solution will be to inflate ourselves out of the predicament. But growth from inflation is not real growth as people will realize.
Our clients who decide to buy a townhouse in New York realize the advantages of owning a building include having potential air rights, owning the land and having substantially larger space than owning an apartment. A client may decide to buy a single family townhouse or buy a small multifamily building where they have primary residence in one unit and have other apartments within the building rented out for investment income.