Future Health of the Real Estate Market: Interest Rates
We have to consider many factors when we forecast the future health of the real estate market, including demographics, the jobs market, and the strength of the local economy. But interest rates certainly are a big factor. And since 2008, when the Fed infused a massive amount of liquidity in the system and effectively artificially lowered interest rates, we’ve been waiting for them to tighten. And now observers feel that’s overdue. But I think there are a lot of good reasons the tightening is still a ways off and that the Fed will keep rates low at least through the middle and possibly the end of 2015, if not longer.
For one thing, it’s kind of odd, if you’ve noticed, that you’ve heard talk of hyperinflation and deflation as what could result from what the Fed has done. And the truth is, economists don’t know which. This was a bold experiment, this kind of infusion of liquidity. And deflation, which can often occur after major financial shock, such as during the depression, is one possible outcome. But hyperinflation is another. And when you print, print, print, eventually that can catch up with you.
But in the meantime, I think there are a lot of good reasons why the Fed won’t tighten right away. For one thing, members of the Fed are historians. And they do understand, as they look back at the Great Depression, which is the closest parallel to what happened in 2008, the response was not to infuse liquidity. It was to tighten. And the result was the Great Depression. But it was actually, unbeknownst to many people, two depressions; 1929’s depression was really quite separate and distinct from 1937’s depression, which took place after the economy had begun to recover. And it took place, frankly, because the government both tightened tax policies, raised taxes, and tightened monetary policy. And I think the Fed wants to avoid that mistake.
But also, some of the factors the Fed will look at, when determining what to do with rates, still point to an accommodative stance. Including inflation, which is running below the Fed’s target of 2%, including the jobs market which, the jobs market is still not that strong, in particular the labor participation rate, which is below 60%, and had been as high as 63.5% before 2008. Also, the economies abroad remain weak. And China has now begun to show evidence of a downturn and, in particular, a downturn in the property market.
These are all factors that will cause the Fed to think twice and wait a while before it tightens monetary policy and raises rates. That’s what I think we can look forward to for the foreseeable future.