Rates, Confidence Rising

By Marcelo Bermúdez, President, Figueroa Capital Group, subsidiary of Charles Dunn Co.

This month’s jobs report showed a 200,000-unit increase compared to the month prior. Assuming the economy can maintain that level of job creation consistently, the U.S. can break the 7 percent threshold by June 2014, which is less than one year away. Decreasing unemployment could signal an inflation scare, but there are several factors to consider. Most of the jobs created recently are significantly part-time and low-paying. This might help the self-esteem for someone who might have been out of work for a while, but it does not necessarily translate into buying durable goods or a home.

On a parallel track, interest rates on commercial and residential property mortgages have been rising quietly. A 25-basis point (0.25 percent) rise in a mortgage represents a 2.5-3 percent increase in monthly cost (depending on amortization), which creates a reduction in purchasing power and ability to qualify for larger loans. Since the beginning of 2013, rates have already jumped almost 25 percent causing a nearly 40 percent drop in residential mortgage application rates overall. In addition, although U.S. states and employers are learning how to comply with the Obamacare Healthcare Act requirements, many employers are choosing to reduce the amount of employee hours to avoid a full-time status to pay for those benefits to remain competitive – not exactly a confidence booster for a family with children. Lastly, technology keeps reducing the need for humans for many jobs. Case-in-point: robot mannequins are replacing the human sign spinner at your local retail center. Despite all this, the Conference Board’s Consumer Confidence Index is at 81.4, up from 74.3 in May 2013. Consumers feel better and have a generally positive outlook on where the economy is headed even if it is muted and slow.

Commercial property lending rates will not and cannot stay low forever. In 2007 and 2008, mortgage rates were in the high 6 percent range, much higher than a recent 3.75 percent rate I quoted for a client wishing to finance a portfolio of multi-family properties in Southern California and 4.50 percent for a class-A, multi-tenant industrial portfolio with almost 100 percent occupancy of non-credit tenants. Rate sheets and LOI’s we have been seeing are already revised with small bumps in rates with some accommodation in the debt service requirement. This could also be a clear path to consider sunset provisions for the quantitative easing efforts led by the Fed. It should end. It distorts asset prices to artificial levels across the board. If expectations are tempered, confidence can continue to rise along with rates so as to avoid scaring off a recovery that is viable.