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Economic Update for the Week of 6/22/2012

The European Central Bank (ECB) is now allowing European banks to pledge riskier assets as collateral in exchange for additional funds. This process started out with the banks pledging good assets to pledging much riskier and lower value assets because they don't have anything else to pledge. The ECB is providing liquidity when liquidity is not the problem. The problem is that these countries have too much debt that they cannot pay back. All the while fund continue to leave Greece and Spain.

Median home sales prices in the US went up 7.9% year over year. Housing permits jumped higher however housing starts and existing home sales while up from 2011 are still weak. There are some good signs here however the problem remains that sellers are not willing to realize that they are not going to get the prices they think their homes are worth based upon 2006 levels especially for the larger homes. So sellers hold out for higher prices and buyers wait for lower prices. Until the two come closer, we won't likely see any major market clearing activity. Inventory has been shrinking however the major banks with all of the foreclosed properties have not yet begun releasing these properties on the market yet. I suspect that as we might see prices start to rise, then we will see this additional inventory hit the markets and push prices right back down, or at least keep them at relatively near current levels.

The Philly Fed Index fell to -16.6 and Chinese PMI (Purchasing Manager's Index) fell to 48.4 (above 50 means growth) which is the 11th reading in a row under 50. Europe has been slowing down and we are seeing evidence of global slowdown.

The Federal Reserve extended "Operation Twist” which is the selling of short-term bonds to purchase long-term bonds with the desired effect to keep interest rates low and possibly push long-term rates even lower. As we've seen, one of the effects of this policy has been low mortgage rates that despite the recent positive price data, hasn't had much of an effect. What we are seeing in real estate is that rents are increasing and since mortgage rates are so low, potential buyers are finding that it is beneficial to own versus renting despite the stubbornly high prices in some areas.

The election in Greece didn't solve much. The elected Government wants to stay in the Euro but wants to stop the government layoffs and renegotiate bailout terms, or in essence not have to feel the pain of austerity. While the fear of the "Grexit” has subsided, I suspect this is not the last we've heard from Greece.

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