September 11th, 2012 9:52 AM by Nick Rapplean
I’ve complained several times that low rates are not the silver bullet that hastens recovery in our economy, though that is still widely assumed. Keith Gumbinger of HSH Assoc. had some good words on the subject this past weekend.
“Low interest rates,” he said again, “have no doubt helped the economy find some footing, but there is a question of how much additional benefit if any can be had by the Fed engineering even lower record lows for rates. Low rates on their own are useful, but not a cure-all, and valuable only to those looking to borrow money. A business won't borrow to expand its operations and hire more people in a highly uncertain climate such as this; however, they will try to refinance existing debt and pocket the improvement in cash flow. We already have a lot of this sort of thing in place, and more isn't necessarily better.”
What seems particularly important is that businesses and taxpayers are inspired by lower rates to refinance existing debt. This does free up a limited amount of funds to spend on other purchases—like automobiles, which have been selling better than they have since the end of 2010. But it does not inspire much in the way of business expansion or consumer purchasing (other than of autos). It doesn’t work to say to someone, “Hey, you can borrow at a record low rate. So do you want a new house?”
People generally don’t make major purchases, and businesses don’t expand their overhead, simply because rates are favorable. What we need are more favorable economic conditions overall, creating a credible sense of growth and recovery in the near term.
Clearly, we don’t have such a sense or perception at work in our society. Or in the world, for that matter. We need a big push in a positive direction, but none is in sight.
It’s not for lack of digging around in the ashes left by the latest unemployment report. Even the Dow Jones Industrials reacted to the report of unexpectedly higher industrial production in Germany. This good news was compounded by reports that British industrial output climbed in July. But the news comes from far away.
Reports such as these lead one to think there may be good things happening just out of sight of the naked eye. The economy still seems primed for improvement. But one of the factors elevating investor expectations, perhaps ironically, is that bad news—such as that provided by the August unemployment report—makes it more likely that the Fed will engineer another program designed to keep rates low.
So we are faced with the question once again: Will even lower rates, probably arranged artificially by the Fed’s purchases of bonds, stimulate the economy further…or will they contribute to the current lack of movement in the economy?
Buried in the data is the apparent fact that construction spending, like just about everything else, stalled last month. For this observer, that continues to raise a question. Driving around desirable areas, I see a lot of construction underway. Reading the data about how far supply is below demand and how long it will take to change that…I wonder when (and if) the logjam will explode and new construction will take off.
Yes, we need a sudden increase in the number of home purchases for that to happen. And we need financing that is as widely available as possible and we need that ability to refinance and sell more homes that remain underwater. We are seeing the number of underwater properties gradually decline, but slowly.
I can’t help but wonder: Instead of embarking on a QE3 or Operation Twist 2 or another dubious and potentially expensive venture, wouldn’t it make sense to focus on supporting real estate right now, taking the medicine directly to the place where it can perhaps do the most good…not just for the real estate sector but for the entire economy?
Surely the time for a recovery in New and Existing Home sales is not terribly far away. Unfortunately, neither is a lot of political nonsense, uncertainties around the election, and the already-legendary “fiscal cliff” of tax increases. Nothing, at the moment, is certain—except that we need more houses for sale.