Super Low Interest Rates A Disservice To Housing

I have owned an apartment complex for many years and we are currently experiencing the largest number of vacancies we have ever had. Many houses in the area are empty or under leased. In 2005 and 2006 prior to the housing collapse many people were looking at second homes, for investments or as a vacation getaway, today not only have they shed the extra home many have doubled up with family or friends reducing the need for housing. We are pushing on a string and calling it demand when someone who can barely pay the rent is encouraged by the government to buy a house they can neither afford or maintain. We have a shortage of "qualified" buyers and renters.

I have been busy trying to make sense of the current economy, this is not an easy job. To do so you cannot take what you hear at face value, you must delve below the surface and peel away layer after layer of what is being said. Many of the messages being promoted as common knowledge do not past serious scrutiny. Those of us in the trenches and with our boots on the ground often see things from a different prospective then the economist in their ivory towers, the Washington politicians, Wall Street elite, or the media. As we are told about the new construction of badly needed houses and apartments it seems we may be at that point once again.

Lower interest rates do not necessarily bring the right kind of growth or prosperity, decades of slow growth in Japan is proof of this. Years ago Lee Iacocca who had brought Chrysler back from the brink and made the company once again viable said something to the effect of when you special out all your cars on Monday you have no sales for the rest of the week. You just moved sales forward with no profit. This is one of the sad accomplishments of  the Fed and its low interest rate policies. They have created a false demand that is eating tomorrows lunch today.

When it comes to real estate low interest rates at some point becomes a double edge sword, that effects both the value by making it easier to purchase thus driving up prices, and at the same time allowing more building to take place and increasing the supply. Often we reach or exceed demand, this eventually has a dampening effect on rents and people stop buying it as an "investment". Prices must rise and real estate appreciate more then the natural depreciation from the wear and tear from age or the main driver for owning it vanishes. Oversupply is the bane of real estate and crushes the value of this hard and expensive to maintain commodity.

Like a spoiled child a certain segment of the economy has benefited from the props of low interest rates and an easy money policy. In reality many segments have not, those dependent on interest on their savings have suffered and the same can be said about those forced to compete against these policies. This has the effect of weakening parts of the economy while putting others on easy street. This has distorted markets and created an unlevel playing field. The easy way often does not make society better. Many of the most productive people in the world were driven by a parent that was a tough task master and hardened by adversity. Policies that undercut the real economy are a disservice going forward.

But lets float our attention back to the start of this post. How does the reality of a half empty apartment complex and a slew of empty houses gel with what we hear about soaring rents, the demand for more housing, and more affordable housing? Only those in Washington would be silly enough to think that landlords who had to compete against subsidized housing would be eager to remain in the game or that someone working for a living enjoys paying more for an older apartment then someone on the dole who moves into a brand new unit for a fraction of the cost. By hurting those who have done the right thing the current policies will have long term negitive cost. Everyday we see people move into a new home and leave older neighborhoods thus hollowing out our cities.

Many people find moving easier then repairing and maintaining the homes they have. Low interest rates drive this trend forward. The policy of putting people in older houses that they have no interest or knowledge in how to maintain causes those living around them to flee the visibly decaying area. America has build a lot of housing units over the years, now we must face the fact that they need to be maintained. Policies should be geared to creating jobs by maintaining these units not in making them obsolete. Instead of creating policies to rebuild our cities and housing Washington has doled out low interest money to Wall Street and home builders in an effort to kick-start the economy this has manifested itself in the illusion of growth and rising prices.

Looking behind the curtain we see as a December 20th Bloomberg article titled "Wall Street Unlocks Profits From Distress With Rental Revolution" points out that much of this is being driven by speculative purchases from mega groups. It also leads me to think big business will continue to crowd the average American out of the real estate market. A close look shows many of the future housing starts are multi-family units, these are being built with this cheap money for the markets of tomorrow with little regard for the realities of today. This is a flashing red light warning of danger ahead. America must face its housing problems with long term solutions, this is the wrong kind of growth and encouraging it bodes poorly for the future.

 Footnote; A lot of peripheral issues are clouding reality, including a massive housing bubble forming in Canada and ghost cities being built in China. Below are two other previous articles that may be of interest.
                       http://brucewilds.blogspot.com/2013/01/has-housing-bottomed.html
                       http://brucewilds.blogspot.com/2012/11/what-is-something-worth.html