It's a new year (BTW a very Happy New Year to you) and the markets face the same confounding question confronting them and us since economic recovery began in 2009.
When will interest rates begin rising into a more normal range and the bank borrowing rate increase from next to zero?
Absent some external shock, the Federal Reserve Bank is in control, doctoring the system and continuing to hesitate taking the economy off what amounts to a drug—extremely cheap capital.
Taken in isolation, the U.S. appears to have strengthened from this policy—good GDP numbers and lowered unemployment suggest recovery has taken hold. But the Fed is still understandably nervous. At any hint of a rate increase the stock market nose dives, bouncing back as soon as contrary signals materialize for continuing to hold rates down. Housing prices have revived finally in most regions—but higher mortgage rates look as if they would blunt positive trends. Car buying has picked up—lower gas prices have been part of the equation, but so has a ballooning of subprime auto loans. We are all waiting for wage rates to increase, but employers still hold the upper hand, using technology to lower their costs. They outsource more work, avoid paying benefits, and hire more part-time workers, as well as shift pension responsibilities and a greater burden for picking up health-care expenses onto employees. Meanwhile, stock prices look high given levels of corporate profits. But investors push money into U.S. stocks and 24-hour real estate markets, because these assets look like the safest bets to provide decent yields.
That's because, as we have discussed ad nauseam, the rest of the world is in recession, close to recession or suffering from declining rates of growth. Flash points abound in the Middle East, Asia, the Indian subcontinent, and anywhere along the Russian border. Low energy prices are largely the result of this general global economic malaise, which shows no signs of abating. While reduced home heating and gasoline expenses bolster U.S. consumers, domestic energy regions suddenly see flush times evaporating. And history repeatedly teaches economic problems raise odds for costly conflict (wars).
So while the low interest rate medicine has worked for the U.S. and its real estate markets after six long years of prescription, the Fed's skittishness only reinforces the obvious—our economy is fragile and could go in reverse quickly. Inflation is not the problem; rather deflation in some world markets is more of a concern. Then again certain asset appreciation (bubbles) needs to be watched closely. In particular, the current Dow levels and the buying activity in high-end condo markets where foreigners park money look increasingly unsustainable.
This all suggests that the Fed will continue to exercise high caution, but try to take baby steps increasing rates during 2015. Any global dustup or sign of hiring torpor could short-circuit their actions. And if rates do increase, even a quarter point, expect stocks to drop and home buying to stall before regaining their footing.
The Era of Less dynamics remain very much in place and a long-term drag—ageing population, higher tax burdens, deteriorating infrastructure, over-reliance on debt, technological incursions. Where would we be right now if interest rates were at more normalized levels? Not in a good place, and that's why the Fed is holding back.
It's a chancy time.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
