Norton on Real Estate: Energy prices key to New England business

I am sitting here in our first real snowstorm of the season. The phone is ringing and people are canceling appointments. I think people look forward to a snow day now more than ever, given the constant bombardment of technology and the hectic pace of doing business in the 21st century. Of course, this is the first snowstorm, so everyone’s excitement level is high. But by the fifth, sixth or eighth that will wear off.

What strikes me as remarkable is that our economy is chugging along despite the Iraq War, high oil and gas prices and the double whammy of Hurricanes Katrina and Rita. Last night I was reading Jeff Thredgold’s Thredgold Economic Associates weekly e-mail newsletter. The subject was the inverted yield curve (short-term interest rates that are higher than long-term interest rates). The historical perspective is that “… in the past three decades, the Fed has tightened eight times and inverted the (yield) curve five of those times. And of those five, all landed the economy in a recession a year later,” according to The Wall Street Journal.

Thredgold says this time it will not happen, primarily for two reasons. First is the continued huge flow of foreign capital coming to the U.S. week after week and month after month. Thus, tens of billions of dollars find their way into U.S. treasuries which are still seen by the global capital markets as the safest and most marketable short- and mid-term fixed-income vehicle (bond).

The second reason, Thredgold states, is the credibility that the Fed under Alan Greenspan and soon under Ben Bernake, enjoy from global investors. The markets feel the Fed will keep inflation in check.

Looking at all the data and reading the newspapers one can easily get discouraged. One example is the talk of the housing bubble. Well, maybe and maybe not. If interest rates stay level (the 30-year mortgage rate has gone down in the past two weeks), houses at current prices are affordable. But if interest rates turn up for a sustained period, then the validity of all these adjustable rate mortgages and construction loans will have an impact.

The irony is that high oil prices generate petrodollar profits, which are reinvested in U.S. treasuries, largely because there is no other safe place for them to go. China’s trade surplus is generating similar flows of capital to the U.S. As long as the capital comes in a steady stream, interest rates cannot – well, should not — rise significantly.

The U.S. economy is the engine pulling the train, which is the global economy. Consider that up to 90 percent of Mexico’s exports go to the U.S. and over 80 percent of Canada’s exports too.

Yes, there is inflation, specifically in energy prices — fuel oil, natural gas and gasoline. Also in health care and higher education. (I just paid my daughter’s second-semester college tuition bill!) But at the same time, global competition from producers is so strong that manufacturers are afraid to raise prices.

One example is that rising energy costs significantly affect plastic packaging, yet retailers and especially e-retailers that ship everything do not feel they can pass these costs on to consumers. It is a very interesting time.

Consider also that the value of the dollar has risen versus the euro and the yen. The dollar remains the global community’s preferred currency.

I don’t pretend to understand it all, and I read about these things extensively. We are at a point where economic history is not predicting current conditions. Of course, this can be a short-term aberration, and only time will tell.

In our business, we see customers and clients continuing to hunker down, trim costs and remain competitive. We do not see folks taking more space or more expensive space. Given rising real estate taxes and energy costs, real estate, whether owned or leased, is becoming an increasingly significant cost component. Therefore, we continue to forecast 2006 as being mostly more of the same, which means value- and bargain-conscious consumers looking to reduce costs.

In real estate, this translates that landlords will likely receive less net rent as tenants pay these increased costs of real estate taxes and energy.

Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE), a Fellow of the Royal Institution of Chartered Surveyors (FRICS) and a member of the board of The Initiative for a 20/20 Vision for Concord. He can be reached at

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