Some questions just make my head hurt thinking about them. “What is the meaning of life?” “What came first, the chicken or the egg?” “Where do those missing socks go?” And, most recently, “What will be the effect of higher interest rates?”
Interest rates already have crept up from historical lows in the past months in anticipation of the Federal Reserve’s plans to temper its vast bond-buying program. What will rising interest rates mean for consumers, investors, businesses?
I’ve thought about it and, thanks to my journalistic bent, as usual, I’ve come up with more questions than answers.
- Housing market — Higher rates will price some potential homeowners out of the market. Will this falloff in demand put a damper on the housing market? Or will these higher interest rates go hand in hand with a strengthening economy, which could sustain momentum in the housing market and fuel home price appreciation, wealth creation and increased consumer spending?
- Commercial real estate market — Cap rates will go up and commercial real estate values will go down. At least that’s the conventional wisdom. However, based on the improving economy theory, it has been noted that NOI growth could offset the negative effect on value. Will property owners take a hit on values, or will rejuvenated space demand tighten vacancies and push up rents, ultimately enhancing property values?
- Job market — There will be winners and losers. The mortgage industry already has taken a hit from higher interest rates and the anticipated lower volume of lending and refinancing. Bank of America, Citigroup, JP Morgan Chase and Wells Fargo all have announced plans to lay off thousands of workers in their mortgage businesses during the coming months. On the other hand, the hiring outlook overall is positive and additional employment gains are expected. Where is the inflection point when uncertainty ends and renewed confidence spurs additional consumer spending and prompts corporations to stop hoarding cash and initiate expansion and hiring plans?
- National debt — Interest rates on the U.S. 10-year Treasury note have climbed more than a 100 basis points in the past year. Every uptick in interest rates adds a few more billion dollars to the United States’ annual net interest payments. Every additional dollar devoted to servicing the debt gets subtracted from another government program — or added to the yearly budget deficit. Will this insanity never end?
Other questions to ponder: Is the “new normal” still “new” or is it now just “normal”? What was the best thing before sliced bread? How come Superman could stop bullets with his chest, but he always ducked when a bad guy threw a gun at him? Just wondering.
The bottom line is that rising interest rates are inevitable. Of course, the Federal Reserve will try to effectively manage the rising rates so that the job market and economy will continue to improve. At least that’s the plan.
Like most imponderable questions, after you’ve pondered them for a while you end up more confused than when you started. The question on higher interest rates is not imponderable; it’s just that no one has all the answers yet.
But maybe JPMorgan CEO Jamie Dimon, speaking at a recent financial industry conference, supplied the best answer, when he noted that if the economy is improving, more jobs are created and profitability is high, so “no one is going to care” about higher rates.
Larry Gray is editorial director of Institutional Real Estate, Inc.
