Lethargic economy is taking its toll on real estate

By the time you read this column, the presidential election will be over. Not knowing how it will come out, I wonder what impact the election will have on the national economy, and the Northeast in particular.

I am not sure either candidate can energize (jump-start is too much to ask for) the economy. One economist has described the U.S. economy as lethargic. No one is excited about anything. In my world, that means leasing activity is very quiet. There is some development/new construction activity but these are build-to suits for users.

At a recent National Association of Realtors conference training mediators, a number of the residential brokers commented on how screwy (their word, not mine) the residential market has become in the past six to eight weeks. Buyers are pulling back. Sellers are tentative. Appraisal values are bouncing all around. Nearly everyone assumes interest rates will increase, and most feel that the increases will likely be in the range of 2 percent over the next year or so. Rising interest rates will put real stress on the residential market. The value of a house or mortgage that one can afford at 5 percent is significantly more than at 7 percent or 8 percent. Many home buyers have over-leveraged, gorging on the historically low interest rates, and many of these buyers have chosen affordable rate mortgages, a good many of which adjust annually (some even quarterly or monthly). So mortgage lenders are beginning to pull back somewhat, tighten up and hunker down. How much and for how long remains to be seen.

On the commercial side, there is still more capital to lend than there are borrowers. We are suddenly seeing some good buys, especially former manufacturing facilities that can be converted to commercial or even retail use. But demand for office space is either flat or still shrinking somewhat. Even warehouse/distribution is flat.

It gets back to economist Jeff Thredgold’s view that businesses are indeed lethargic. No one is enthusiastic about making bold moves.

One night, during one of these long Red Sox playoff games, I finished reading “Rise and Fall of the Great Powers,” by Paul Kennedy. This is a very interesting (even if overly detailed and quite long) account of England, France, Germany, the United States, Russia (and now Japan and China). The discussion is about how expensive it is to be a world power, especially in the 21st century. The weapons systems are complex, and very expensive. The fear of nuclear holocaust and “conventional” conflicts which means lots of soldiers, sailors and airmen deployed in Europe, South America, the Middle East, Far East and at home in support and logistics roles. Wars are typically financed by debt. We only have to look back five short years to see how much power and momentum budget surpluses brought to the U.S. economy. There are no budget surpluses in view for the next five to 10 years. The strategy to raise taxes to shrink the annual deficit is thought by many to be a break on a stalling economy (which needs gas). It is a tough place to be.

The commitment of the U.S. to peacekeeping, our long-term commitments to our allies in Europe and South Korea, as well as the fight on terrorism is close to having us overextended (emotionally and politically as well as financially). Only a sustained strong economy is going to give us the wherewithal to serve as the world’s policeman. It is hurting our economy.

I don’t think we can have it both ways, and in the 21st century the world has shrunk to the degree that we cannot revert to an isolationist stance. We need to identify a middle course that allows us to prosper, protect our interests and through real coalitions and alliances deal with all of the threats around us. This is easier said than done. If we misstep we will likely take quite some time to pick ourselves up and get back on track.

Bill Norton is president of Norton Asset Management. In addition to his active brokerage work, he is a Counselor of Real Estate. He can be reached at wbn@nortonnewengland.com.

Categories: News