Rates are low … and that's not all

Real Estate Weekly, April 21, 1993 by John M. Rossini

On January 20, 1993, the New York Times reported that "five of the nation's largest banks ... reported higher than expected earning ..." [and] " ... the end is in sight for the industry's trouble with real estate loans." Three of those banks, Citicorp, Chase, and Chemical are headquartered in New York. Is it any wonder why mortgage rates have now fallen to the lowest level in 20 years? Any banks lending money have been profiting from the extremely low rates paid on deposits (2 percent to 3 percent), verses the rates charged on loans. With reduced troubled real estate loans, as evidenced by Citicorp's $300 million reduction in loan loss reserve (New York Times, January 20, 1993), and a rally in the bond market, - mortgage rates had to fall.

The Bond Market

Let's take a closer look at this bond market rally. On March 8, 1993, the 30-year Treasury bond dropped low (NYT, March 13, 1993.) Accordingly, mortgage rates on solid, medium-sized, cash flow, commercial real estate had dropped to around 8 percent - the lowest in 20 years. In the February 20, 1991 issue of Real Estate Weekly, I advised real estate investors not to try to " ... time the bottom ... " with regard to interest rates.

Well it looks like the bottom is here. Note that five days after the 30-year Treasury Note rally, prices for these securities" ... plunged ... " and the yields " ... leaped ... " to 6.86 percent, and then only 3 days later. ".... jumped ... " again to 6.89 percent (NYT, March 13 and 16, 1993). Now some of this fluctuation was caused by fear of that sometimes dreaded phenomenon inflation.

Growth and Inflation

During an early March 1993 radio show, Sonny Bloch, a best selling author and syndicated radio talk show host, exclaimed, "Inflation is back!!" He did not say for how long or how strong, so let's take a look at some recent statistics and economic fundamentals. During February 1993, the wholesale price index jumped 4 percent; the highest increase in two years. Although one month does not make a trend, Richard Rippe, chief economist at Prudential Securities, commented that such a wholesale price increase "... is a classic sign of economic expansion ... " Also note that the national economy in the fourth quarter of 1992 grew at an annualized rate of 3.8 percent, (Anything over 3 percent is considered significant by most economists.)

The Action Plan

I am not suggesting that interest rates are going to continue to rise exponentially or that the economy is booming. But keep in mind, these increases in growth and inflation come on the heals of staggering declines in New York City real estate values. According to the tax accessors's office, the city's real estate values declined 16 percent in 1991 to $303 billion and declined another $21 billion in 1992.

So it's clear that appropriately priced commercial real estate is a great investment right now, because a) prices have declined, b) modest inflation and economic growth will increase real estate values over reasonable time periods, and c) the money is cheap! Low interest rates also indicate it's time to refinance your commercial property. Availability is still difficult, yet selected lenders are increasing mortgage loan output because of the aforementioned improvement in bank earnings.

Yes, interest rates are low, and that's not all! With modest inflation and growth, and recently depressed real estate values, it's time for the real estate investor to act.