So when will the market become ‘normal’ again?

From traditional metrics, it should have changed already


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June and July have been warm, even hot, but especially dry. But all this concern about the weather is like politics. We talk about it constantly and there is not much we can do to change it. 

The stock market has more or less recovered from its correction earlier in the year. However, if I heard the news story on the radio correctly, the market is up 4 percent since January, but only due to six stocks! Except for them (Google, Amazon, Microsoft …), the market would be down. That is a lot of eggs in one basket, or six baskets, so to speak. 

Commercial real estate rolls along. The big drivers are lots of dollars to be lent and very high construction costs, prompting interest in existing buildings and properties and not many options where one can get a desired return on investment. 

Housing costs, for both single-family and multi-family, are climbing every week. My daughter and son-in-law are frozen out of the market in suburban Boston. I keep telling them to wait. They ask, “For how long?” and I have to say I do not know.

From traditional metrics, the market should have changed already. The conclusion is that, well, this is not following traditional metrics or economic cycles. But the gradual rise of interest rates squeezes returns for lenders — at some point, home prices will be affected — first flattening, then nudging down.

When people really press me to elaborate on my thinking, I explain that interest rates have been artificially suppressed for 10 years. We will move toward “interest rate normalization,” although no one I know is exactly sure how to do that or when it will happen. My best guess is that as the Fed tries to raise interest rates in a slow and measured way (the goal is 3 percent to 3.5 percent for the 10-year Treasury), they may not be able to stuff the cork back in the bottle quick enough. The whole concept of inflation today is skewed. We do not count “transportation” (i.e., gasoline, which is up around $3 per gallon). We do not count “food.” So inflation is rising mildly for those of us who do not eat or drive a car. The pundits are saying we should see much of the same into 2020.

Wage growth has been restrained except for public sector workers (albeit in some states, teachers are clearly underpaid). With unemployment under 4 percent, wages have to go up. Or do they?

While hourly wages may go up, it seems benefits are being cut. Further, employers are not finding workers with the needed skills. This is now called the skills gap. We are running out of competent workers. There are 6.6 jobs per available worker! On top of all this stress at home, we have a potential trade war brewing fueled by rising tariffs. Historically, unilateral imposition and increases in tariffs result in retaliation. The fact is, while everyone cites the Smoot-Hawley tariffs of 1929, we simply do not know where this is going and how it will turn out. 

Yet corporate earnings are strong and it appears the new tax revisions are, in fact, resulting in some corporate profits being repatriated back to the U.S. If, as most pundits are predicting, we can manage a slow, methodical rise in interest rates, then there appears to be up to three good years ahead of us. But this could be at a grand level, especially in the A markets (New York City, Washington DC, San Francisco, Chicago, Boston). In smaller markets, it may be more volatile/bumpy. 

In real estate, commercial transactions are happening both for investors and users. But for those of us in the trenches, it is a slow, often grinding process. No transaction is smooth. Everyone seems to have inertia and friction (literal and figurative). Alas, there is no problem so great that it cannot be solved by brute force and ignorance. Fortunately, we have plenty of both! 

Bill Norton, president of Norton Asset Management and an honorary member of AIANH, is a Counselor of Real Estate (CRE) and a Facilities Management Administrator (FMA). He can be reached at wbn@nortonnewengland.com.

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