Standard & Poor’s negative outlook on the United States credit rating is another warning shot for what’s to come—retrenchment in government spending, higher taxes, and higher interest rates. It’s certainly a discomfiting combination for the nation’s real estate markets, but this is the bitter medicine for decades of profligacy--taking out the national credit card and running up bills on everything from wars to healthcare.

For close to a decade now, the Federal Reserve has been artificially keeping interest rates low because our economy needed cheap money (for credit) to keep the illusion of prosperity going. Meanwhile, our national debt kept growing and our debt service costs exploding since the mid 1980s. It’s been a time bomb.  In fact, every year in my Emerging Trends interviews, a handful of respondents raise concerns about what would happen if world finance markets took interest rate maneuvering out of the Fed’s hands—well now it looks more likely that we will find out. And that means, interest rates will go up at least to more normalized levels and maybe higher. Under any circumstances, real estate dealmakers who got used to a low interest rate environment, will need to factor in higher expenses at a time when market demand is anything, but robust. And their tenants ultimately will face increased costs for doing business as well—that won’t exactly help demand. 

Now not to beat a dead horse, I’ve been talking about how not only will government spending need to be controlled to tackle our debt crisis, but taxes will also need to go up. There’s no other way. And taxes will increase for everyone, not just the wealthy sliver of the population. They are anyway—sales taxes, fees, tolls, property taxes—all head up, up, and up. And at the same time, government services along with many jobs associated with those services are getting cut.

So with higher interest rates, less government spending and higher taxes will the United States economy suddenly transform into a jobs generating juggernaut—filling office buildings and stoking incomes so people will buy new homes and spend in shopping centers? In some pipe dreams, the jobs engine ignites, but only in pipe dreams or speeches from our leaders of all political stripes. Sure the unemployment rate has begun to fall, but you know the numbers—we lost more than eight million jobs in the recession and still have more than seven million new hires to go before we fill the gap at the same time our population is growing with more job seekers entering the market. Helping fuel recent employment up ticks have been stimulus—both tax cuts and increased spending—but as we know we cannot keep the stimulus going without augmenting our debt problems. 

Who knows whether the U.S. credit rating will get downgraded, but the odds certainly increase. And there’s not much escaping that the U.S. is headed for an austere time. The best we can hope for is this difficult period can lead eventually to a time of greater prosperity with less dependency on borrowing and credit. Let’s not kid ourselves—this will be a long and difficult slog, not great for investors in the property markets.