Let me start from the beginning and give you a basic and complete walk through explanation of what the Federal Reserve is doing with operation twist.

What is Operation Twist? “Operation Twist” is a form of flattening the yield curve. The reason why the Fed would want to flatten the yield curve is because they want to lower long term interest rates because longer term interest rates are what is tied closely to business expansion (capital investment), mortgage rates (home buying, refinancing, etc), which in turn can lead to more consumer disposable income, job creation, etc.

Why do Operation Twist? Traditionally the fed simply lowers the target fed funds rate, lowers the discount window rate, etc. The issue is….well we are pretty much rock bottom. In addition, the fed manipulates the markets by injecting more money into the system, or as some “anti-feds” may say; print money. With such actions come an increase risk of inflation. Operation Twist, in theory, allows the fed to manipulate long term rates without increasing the money supply.

How does Operation Twist Work? What the Fed will do is sell short term bonds. The Fed announced they will sell 3yr bonds and shorter and use these funds to purchase longer term bonds; between 6 and 30years. The total amount of “money” being shifted is $400 Billion. The act of selling short term bonds will increase the supply of short term bonds, therefore lowering their price (law of supply & demand). This will increase the yield (rate of return) on short term bonds. The action of buying longer term bonds will decrease the supply on the market (law of supply & demand) and therefore drive prices of long term bonds up which in turn means yields will decrease.

Specific $ Details:

$400 Billion Dollars

3 Year & shorter term to be sold to finance longer term

6 to 30 Year considered longer term; financed by short term sale

Market manipulation to be completed by June of 2012

Other Fed Actions: The Fed also plans to use principal payments received from their held mortgage backed securities to purchase more agency mortgage backed securities. The hope here is to directly impact the mortgage market to increase liquidity and lower mortgage rates. In very basic terms here is what they’re going to do. Essentially, every month the Fed receives mortgage payments for the mortgages that they current hold (held as Mortgage Backed Securities, MBS). Part of these payments are interest, while the other part is to pay down principal. When principal is paid down it means there is now that much more money to lend out. Instead of the Fed holding onto that money, or injecting it into the system through treasuries, they will utilize these funds to purchase more mortgage backed securities.

Why Should the Fed Reinvest in Mortgage Backed Securities: Mortgage Backed Securities market provides new funding for roughly 90% of refinances and new home loans. Traditional buyers of such products were hedge funds, pension funds…the list goes on. During the financial crisis this was one of the first markets to dry up. Demand dropped quickly. No one wanted to own a mortgage backed security, it was toxic! This market still has not recovered and demand for mortgage backed securities remains low especially among low returns. The Fed’s action of rolling over principal back into the market means it will start to soak up supply of agency MBS which is a huge relief! While many analysts and traders do not believe this will lead to dramatically lower rates (if any lower at all) it will still help stabilize the market.

Will Operation Twist & the Feds actions help the housing market? In my opinion No. Rates are very low right now, very low. I have two buyers closing next week and both are locked in at 4.35% on a 30yr fixed. That is pretty darn cheap. If we assume that Operation Twist and the Fed’s Actions of buying agency MBS lower rates from 4.35% to 3.9 or 4% what will happen? Unfortunately not much. What it will most likely do is push some people off the fence who were already very interested in buying but just need a little nudge to the buying side. This might do that. However, this demand was essentially already there.

Imagine you’re selling cheeseburgers to a crowd of people. If you’re asking $2 for a burger some people will buy and some won’t. If you lower the price to $1.50 you will probably get some more buyers who were already hungry, but would someone who just ate dinner buy your burger? Probably not. All you would accomplish by lowering your burger prices is get people to buy a little quicker. These people probably would have paid $2 in a hour or so once they got hungry enough.

The same is true with the mortgage market. Rates are so cheap as it is that rates are not the problem! The problem in the housing market are many other factors. Potential buyers are concerned about their jobs, housing prices falling more, their inability to qualify for a mortgage, etc. These are the impediments holding people back, not interest rates. If we do get lower rates, we will see a small quick bump up in demand but it will be short lived.

Refinance: We will see an increase in refinance numbers as well. However, those who really NEED to refinance cannot because their homes are under water. You can lower rates to next to nothing, but if the people who need to refinance the most can’t, then it doesn’t matter.

Markets are Not Down because of Fed Decision: To the idiots who keep saying the markets are down because of the feds decision this is completely false. The markets had already priced in Operation Twist. In recent weeks it was pretty much expected and baked into the numbers. QE3? No, no self respecting investor or trader was truly expecting the Fed to come out with QE3. Why was the market down? Well, Europe isn’t helping any, we had wonderful downgrades by Moodys (don’t even get me started on that) and the Fed did some extra talking too! In the Fed’s statement released along with Operation Twist & their MBS decision were comments that held a very negative bias as to the outlook for the economy. This is what pulled the market down, not the announcement of Operation Twist and the purchase of MBS.

SONO Apartments – Have a Buyer Lined Up! Lincoln Park

If you’re familiar with the Lincoln Park skyline, especially the view coming from downtown then you know SoNo, a condo building located at 860 W. Blackhawk. What you may not know is that the developer of this building had planned a second condo tower with the address of 840 W. Blackhawk. When the condo market took a turn for the worst, however, developers Bill Smith, Gordon Segal and Stanley Nitzberg decided to turn the second tower into apartments. The second building which broke ground earlier this year already appears to have a buyer lined up for their 324 unit apartment building; Prudential Real Estate Investors, LLC.

While exact prices haven’t been disclosed yet, the building is expected to fetch around $345,000 to $355,000 per unit. This rapid sale again begs the question: “Is the multi-family market in a bubble?” I’ve written about the rapid increase in apartment building construction in Chicago before, but now I need to comment again.

While I do believe we Class A Apartment Buildings are in “bubble mode” I do not see a massive crash in the market. Right now, we are seeing all the beginning signs though of a bubble. Developers are starting to build very quickly. Upon getting approval for their building at 500 N. Lake Shore Drive, Related Midwest broke ground immediately. Financing for them was a piece of cake, at least in comparison to the financial difficulties still plaguing construction today. Unlike condo buildings, apartment buildings do not need to wait to pre-sell 30% of their units before breaking ground. Because of this developers are able to get projects off the ground very quickly. Right now we have over 2000 apartment units under construction in the downtown and great downtown area. Plus there are almost triple that amount in the planning phase!

I don’t see a falling out in this market to the point of building defaults in the next year or two. However, after that we may start to see some. Right now buildings are being priced on pro-forma levels of rents that are predicted to increase substantially over the next couple years. With this massive influx of rental inventory about the hit the market in coming years, apartment owners will start to lose their edge. Rent prices have increased in double digit amounts year over year in the downtown market. While these prices are still cheap in Chicago compared to other major markets (LA, NYC, London) it becomes a basic function of economics. People have a finite amount of money and that is it. You can only push them so far. With interest rates remaining low buying is starting to look pretty attractive. I’ve already had several clients this year decide to buy instead of rent. These were people who were in the market, initially thinking of renting and after evaluating prices decided it was beneficial to buy. Only time will tell how long this “apartment bubble” can remain before popping.

Wal-Mart Opens in Chicago’s Loop – Presidential Towers

Compliments of the Chicago Tribune

Yes folks, that is right, Wal-Mart is open for business in Chicago’s Loop. Wal-Mart opened its first “Neighborhood Market Store” in Chicago today at 555 W. Madison in the Presidential Towers apartment complex. According to the Chicago Tribune it will have the following: “It carries fresh produce, meat and dairy products, frozen foods, dry goods and staples, pet supplies, health and beauty aids, stationery, a deli, a bakery and a pharmacy.”

Judging from the outside of the store it looks pretty nice in my opinion. Of the course there will be backlash from many who don’t want Wal-Mart in the city, who shout that Wal-Mart does not benefit communities, but at the end of the day a filled retail store front is better than an empty one. Opening a new concept such as this, in a city filled with Whole Foods, Trader Joes, Dominicks “Life Style” stores, Mariano’s, and Eco Friendly Jewel Oscos, Wal-Mart has no choice but to compete not only in prices but also in quality. I’m very excited to visit this store and see what they have done. I have no doubt in my mind that it will be successful and will be enjoyed my area residents.

Wal-Mart plans several new stores in the coming quarters, two specifically in the Lakeview Neighborhood.


The Federal Reserve has launched Operation Twist. The basic idea behind operation twist is to flatten the yield curve. What the Fed is attempting to do is bring long term debt yields down in order to spur business expansion and the housing market. Right now as I write this article the 10YR is below 1.9%

This is a STERILE action by the fed, which means they are NOT injecting any more money into the system.

They plan to trade roughly $400 Billion dollars in paper. They will be selling 3yr and less debt and purchasing between 10 and 30yr. Roughly 29% will be focused on the purchase of 20 to 30yr notes, roughly $120billion.


One thing I forgot to mention is that the fed is planning to take funds from maturing securities and purchase agency mortgage backed securities. As of time of writing this article the 10yr is at 1.875 and the 30yr is at 3.01. Levels we haven’t seen since the 1940s.