No Problem: Just Keep Rates Low

Strip away all the rhetoric about the “great economy”–real estate markets and the stock market have been living off abnormally low interest rates since the deep 2008-2009 recession. After a record of 10 years and counting between recessions will a downturn be kept at bay indefinitely? And will this apparent new normal of low interest rates enable worry-free piling on of debt and ongoing lowering of investment risk? Then again is economic growth, which peaked around 3%, and now hovers around 2% really so “great”?

Despite the record federal deficit, record corporate debt, and consumers back to credit binging—we’re told to relax because of low rates. It’s all about low rates and keeping rates low. After some reasonable rate upticks given extremely low unemployment, corporate earnings gains spurred by tax cuts, and the stock market advances, the Federal Reserve even reversed that course last year, possibly cowed by a President with an eye on re-election. But why not? Inflation, including wage gains, has been anemic. With rates so low where else can you invest to get a decent yield, but in stocks and riskier plays? And that’s okay for now, because of the low rates.

Trade wars. No problem. The threat of another Middle East War and higher oil prices. No problem. Impeachment and government turmoil. No problem. Record federal deficits. No problem. Just keep rates low. No problem.

Let’s face it. We’re in uncharted and uncertain territory.

Look at real estate returns. Full-year 2019 NCREIF performance for core funds will be in the mid-single digit range. Appreciation is mostly tapped out as retail properties pull down overall results. Luxury apartments have been overbuilt and office is overpriced. Industrial looks like a great income play, but cap rates have lowered to levels that would normally signal caution. And core investors are disappointed. Money instead is going into debt juiced funds or overseas investments when Europe is much weaker than the U.S. economy, India flags in ethnic turmoil and ongoing corruption, and China further cools. Investors are also back to looking at student housing or senior care facilities. Infrastructure gets more attention too. Anything that may have more juice. This is the time in the cycle when investors go off the cliff, taking higher risk when they should stick to core. But those low rates offer cushion in case of a downside. Or so the thinking goes.

A little more than 10 years ago, everyone had bought off on how housing prices would keep escalating and CDOs were failsafe investments. A decade before, internet stocks had nowhere to go but up. And in the mid 1980s, it was junk bonds and various tax dodges that couldn’t be missed.

So why are low interest rates any different? Indeed why?

A Note: Neal Peirce, founder of the CitiStates Group of which I was a member, died at year end. Unquestionably, the nation’s leading journalist on urban affairs, Neal championed cities as the nation’s engines of economic growth at a time when white flight was in full dimension and most observers saw our future in the suburbs. Today our 24-hour cities stand preeminent and secondary markets realize the necessity of strengthening their urban cores to sustain prosperity, attract new industry, and benefit from cultural diversity. Cheers to Neal.