Capital Insights with Jack Kern

"I don't think we're in Kansas anymore"
Dorothy in the Wizard of Oz
(c) MGM 1935

The election o
f Barack Obama to president of the United States is going to have a diverse impact on markets, real estate and ultimately the status of the recovery package authored by the U.S. Treasury department, under Henry Paulson. Not since the administration of Herbert Hoover (what a fun president he was) has a newly elected president faced the myriad of complexities we are now facing as a nation.

There are a lot of promises contained in the campaign messages that now ring hollow, it seems to me and while the reluctant euphoria of the Grant Park celebration is manifest in everyone's mind, I want to address a perspective that's important to consider.

The Treasury department, prior to the election, with the assent, under stress of Fed Chairman Bernanke began to flood the markets with some degree of liquidity. The essential purpose of this liquidity is to loosen credit markets and make the banks more willing to lend to one another (overnight LIBOR) and also to take a second look at their policies of tightening credit. Fundamentally it hasn't worked as planned but some sectors are beginning to show very modest gains. Within our real estate industries, there are some indications that the availability of credit for acquisitions is progressing towards a more responsive standard. Whether this is due to the obvious pressures faced by buyers and sellers isn't clear yet, but with Fannie Mae more than willing to underwrite deals, some transactions are being closed.

The great Federal bailout of the banks, to the tune initially of $750 billion is part of the Obama election mandate of not doing for Wall Street what is needed for Main Street and expect to see some real reticence from campaign advisors to make future funds available for this purpose. Even Bernanke has been noticably quiet about how well the bailout is working. Remember we believe that Bernanke is upset that the Treasury department under Paulson has co-opted the role of the Fed in managing the banks and the money supply. With House Speaker Pelosi still pushing for additional bail-out funds, the end result will be a show down between the new administration and a Congress firmly entrenched in the belief we can spend out way out of this mess.

In the Wizard of Oz, Dorothy's house was uprooted and blown from Kansas (if you've ever been to Kansas, you'll appreciate the humor in this scene in the movie) all the way to Oz. By my own calculations, the likely result of this, aside from being removed from Kansas, is that Dorothy's house is now in a much better neighborhood in Munchkinland and her principal concern would be front foot benefit charges and taxes. With a house sitting on the main street in the middle of town, overlooking the best shops and parks, Dorothy has a double problem now, higher taxes and questionable property values. Sounds kind of familiar doesn't it?

As the next few weeks progress, expect to see the beginnings of a new tax policy, and in the offing, a likely slow down in any probable relief for homeowners. Oz included, the markets will be slow to return to some level of stability until next October, and between now and then, the newly reconstituted Congress, according to a friend of mine that currently serves in the Congress, will view previous Bush administration policies as flawed and at risk. With all bets off, renters will stay longer in their apartments and we'll be seeing another irrational attempt by the National Association of Homebuilders and the National Association of Realtors to game legislation to their advantage.

An earlier print of the Wizard of Oz apparently had, according to legend, signs for new subdivisions all along the Yellow Brick Road, on the way to the Emerald City. It seems if Dorothy has been a real estate investor, this might have turned out differently after all.