Written By:
Ingo Winzer, President
Ingo Winzer, President
Local Market Monitor
We
usually believe that low interest rates
are good for the economy and especially for real estate, but the fact that
rock-bottom rates the last few years have done little to boost demand suggests
the situation is more complex. An
alternative scenario is that low interest rates lead to heavy borrowing from homeowners (cash-out
refinancing, home equity loans, new homeowners) and a search for higher yields (sub-prime mortgages) from pension funds
and companies with future obligations. In this scenario, cheap debt initially
drives up demand (and therefore the price) for homes, but saddles homeowners
with so much debt that they're
eventually forced out of the market.
From
1998 to 2005, the 1 year ARM rate minus inflation steadily fell from 4 percent to 1 percent. Meanwhile, annual
new home sales increased steadily from 900 thousand to 1300 thousand, home
prices rose 65 percent, mortgage debt doubled by $5 TRILLION and home equity debt rose from almost nothing to $450
billion.
The economy keeps improving. Jobs in October were up 2
percent from last year. Notably, jobs in manufacturing were up 1.4 percent,
spread among almost all categories except electronics. Jobs were up 1.8 percent
in retail, 3.6 percent in business services, 2.1 percent in healthcare and 3
percent at restaurants. Especially encouraging is that jobs in transportation -
a strong indicator of business activity - were up 3.5 percent. Overall,
government jobs were virtually flat, but local government jobs increased.
Unemployment fell to 5.8 percent.
