In the early 1980s, we experienced the prime interest rate being above 20%. We were in an economic recession here in the U.S. back then, and people weren’t too excited in knowing that if they purchased commercial real estate, they’d be asked to pay more than 20% in annual interest on their loans.
But in looking at today’s interest rates, do these rates truly reflect what the real market interest rates should normally be? Over the years we’ve been told that interest rates should take into account the real level of inflation, and then the lending rates will be somewhere above this level, representing an amount of return above and beyond what the current level of inflation is.
However, in recent years the overall numbers haven’t been making nearly as much sense to all of us. While we hear that the inflation rate is low, when we look at how much more we’re spending these days on the price of food, and how much the cost of housing has gone up for so many people, there’s something about the reported rate of inflation that just isn’t making sense.
So when looking at Web sites like ShadowStats.com, a site that reports on how the calculation of our major indices dealing with both inflation and unemployment rates has been changing over the years, we find that today’s inflation rate would now be 6% if it were still calculated the way that it was years ago. In addition, today’s unemployment rate would be about 22.5% if it were still calculated the way that it was years ago, too.
So what we’re seeing are interest rates that don’t make sense based upon the real, underlying numbers as we’ve known them, representing a subsidy to some people, and an additional expense to others. Keeping this in mind, real estate itself benefits tremendously from these interest rates that have been made artificially lower, as people can now own properties with lower monthly payments, which helps to maximize the upward pressure on today’s property values, too. Businesses will benefit from this also, as they can now borrow money at these lower interest rates.
Some of the people who are taking a massive hit, though, are the people with retirement pensions, as the rates of return on their pension plans have been far below what the projections had been, because of these lower interest rates. So this all depends on which side of the subsidy you find yourself on, in terms of whether or not this may be working for you. The good news in commercial real estate, at least for now, is the fact that while The Fed has begun raising interest rates, they’ve begun doing this very slowly. This is very important, as we don’t want to see any major disruptions within our commercial real estate market. So when taking all of this into consideration, while most of us in business and industry are opposed to government subsidies, if we’re going to end up on one side or the other one, we’d most likely rather end up on the one side that benefits us.