If Interest Rates Go Lower

Up and down. Rollercoaster or see-saw?

About every two or three weeks we see a huge stock market sell off.  Then the market -- as it historically always has done -- slowly creeps back upward.

Worries over the strenth of the entire European Union. The strength and viability of hte Euro. Greece may default on its loan obligations -- on purpose -- which has Portugal and Ireland panicking Headlines on many news services late this afternoon say roughly the same thing: Investors in the stock market are dumping everything.

George Soros (not someone I put a lot of stock in -- he is not about "progress," he is about his own self interests at the expense of many American liberties, but thats a subject for another day) has said we are entering a second recession. Guess why he's saying that? Might be true, but my thinking is he wants to drive markets lower. If I had to bet, he is buying stocks right now. You know, buy low now-sell it later when it rebounds after the market realizes they are articificially depressed. His defense will be that he was asked what he thought. He can't control how people respond to his words. But I'd bet anything he's hopeful people panic based on media reports of his remarks, and he quietly buys up stronger, more valuable stocks that are being hammered irrationally by emotional sellers.

At the same time, Robert Zoellick, president of the World Bank, says the world is "in a danger zone." Mutual assured destruction of the Cold War has been replaced by economic reliance on each other. Nations needing others to succeed financially, thereby no need for war. But what happens when mounting debt creeps so high that nations decide to welch on their obligations?

Much of the sell off last week and today, IMHO, is emotional. Asia panics, Europe reacts, and like lemmings American investors follow everyone else over the cliff. Smart investors are carefully looking at buy opportunities. If they didn't get in today, depending on what happens tomorrow, Friday, there will likely be some folks getting in a rock bottom prices courtesy of those who are bailing.

With that said, Moodys Investors Service reoprted recently that U.S. commercial real estate prices advanced 5 percent, marking a third straight month in July as deals for smaller properties. The Moody's/REAL Commercial Property Price Index gres 5 percent from June. It is up 1.2 percent from a year ago, and nearly 13 percent from its post-peak low in April.

Still, realistically, this rebound may slow depending on the economy. President Obama sent mixed signals, as did Federal Reserve Chairman Ben Bernanke, when he both noted that the Fed's actions will likely further reduce interest rates. But then he said we are in a second recession, sparking the latest panic. Moody's report noted that the gain is more likely a continuation of "the bottoming process" than a harbinger of recovery. "Slow job growth will crimp expectations for the absorption of vacant space and for rent increases, which in near turn will constrain near-term price increases."

Still a buyers market for commercial/investment real estate. Depending on the property type, of course. Multifamily is still strong, but it is getting more difficult to find commercial lenders willing to back a lot of different acquisitions. Cash buyers -- whether they are private investors REITs, pensions, or insurance companies -- are quietly swooping up better quality properties of all kinds.

Now, back to whether interest rates will drop futrher. There are some things to think about; even if interest rates go lower, two thirds of the market would have to sit out any opportunity. Why? Look at it this way --

     -- the lower third  couldn't qualify anyway due to credit problems, too little income, etc..
     -- the upper third don't need it; this group is paying cash for property these days (in fact sales of luxury homes $5M and higher are up 20 percent year to date over 2010)
    -- the middle third previously had to go with alternate financing, and that has pretty much dried up now.

So lower interest rates might not really do to much to stimulate real estate sales. So then who IS buying commercial/investment real estate today?  Wealthier investors getting out of the stock market are converting funds to self-directed IRAs and picking up investment properties. I have two such clients I am working with now in this category, with a third who is making the move and wants to start looking for available properties within two weeks.

Today's continued stock market drop prompted the latter investor place a call a few days ago, telling me he is ready to pull the trigger. That, combined with rumors that interest rates may be lowered as a gasping means to jump start borrowing for any number of types of acquisitions. with plenty of money are being begged to use even more money. and even they are feeling the squeeze to some extent.

But everyone else is just standing there.
Less than 1 percent of investors are in CDs. Those still in the market, which is increasingly volatile, are looking at projections that we are going to have another significant "correction." Wealthy are in a good position now to pull out and wait until it is advantageous to get back in.

Rates are going to be 4 percnet on a 30 year fixed.  Financing is HALF of what it was five years ago, so now -- if you are development minded -- you can pay a lot more for a project now than you would have in 2005.

And in all this, the cap rate compression we are seeing with rates this low are unbelievable. It just defies explanation.

New chapters on all these sagas to be written in world financial and CRE markets on Monday ....