Letters to the Editor: Housing Inflation and Interest Rates
Regarding your July 24 story, “NAHB Interest Rate Concerns Arise in Bernanke Testimony,” we in the building industry can’t have it both ways: after enjoying the under-calculation of inflation during a period in which low interest rates helped weaken the rental industry by converting renters to owners, even as house prices soared, it makes the industry look bad to now spin the numbers the other way.
What is really happening here is that inflation is having a one-two punch. With interest rates rising as the artificially created, world-wide capital glut is finally dried up by the various responsible central banks, we have true, and significant, housing cost inflation.
Yes, it costs more to own a home, as builders and home owners try to hold to the inflated prices they’ve become accustomed to now that interest rates are trending higher.
Yes, this lets fewer people out of apartments and into homeownership.
Yes, this gives the rental industry the ability to raise rents now that their customer base is growing again.
But the inflation indicator is rising because of real increases in housing costs. Obviously, rents would not be climbing if equivalent houses could be owned for an equal or lower cost, would they?
The party is over, and this is only one indicator of the relative mess left behind for Federal Reserve Chairman Bernanke by his predecessor. Under Alan Greenspan, we had a world-wide capital glut and resulting asset-price inflation, instead of more traditional wage and consumer-goods inflation, which was kept in check by the impact of China, WalMart and others on wages and the pricing of consumer-goods. Houses, bonds, diamonds, gold, high-end automobiles, art, commercial real estate, investment assets of every stripe — the territory of those with assets to allocate — all inflated terribly but were not adequately reflected in Consumer Price Index calculations.
Regardless of the Fed’s actions at this point, asset prices are going to correct as interest rates return to something reflecting normality — 2% or 3% over reasonably expected inflation for Treasuries, with reasonable premiums to reflect the risk of all alternative investments. Mortgage-backed securities containing home and commercial real estate loans will likely see 150 to 250 basis point premiums over similar-maturity Treasuries. If inflation is 2%, expect home loans about where they are, but if inflation goes to 4%, expect 8% home loans. For those of us in commercial real estate, including apartments, cap rates will revert to 7% to 9% for average, non-trophy properties.
The industry should get ready, because this isn’t going to be especially pretty, even though everyone could see it coming at least two or three years ago. Since it will be the free-market system actually making the adjustments, Washington, D.C. and the Fed will have little ability to moderate, unless they decide to push it off until tomorrow by providing further artificial liquidity, which in the long run will only make matters even worse.
Gary C. Simons, CEO
Upside Investments, Inc.; Calabasas, Calif.
How do we get across to this Administration and to the Fed that the 17 consecutive increases in interest rates are the single most inflationary factor in the economy? Energy costs are up, and they are certainly inflationary, but they pale compared to interest rate increases, which have a direct impact on new home buyers and businesses.
By comparison, Japan has raised its prime rate to just below 1%, thereby maintaining a more competitive position in the world market.
Receiving Stolen Goods
On your July 24 article, “Builders Step Up Response to Job Site Theft,” I would like to see more laws for prosecution on the receiving end of the stolen property. We are commercial plumbers, and after we had 850 pounds of copper cut out of a building, a person who was not a plumber was carting it into a recycling center every single Monday. Hello, big alarm, nothing was done to the recycling center. The thief got a slap on the wrist and was released from jail. He was a carpenter!