Now here’s an interesting thing: Mike Mandel, on his blog, has managed to avoid
the housing mania which seems to have overtaken much of the rest of the blogosphere,
myself included. No talk about credit crunches, no talk about housing-led recessions,
no doom-mongering in general.
And now he’s written an eminently sensible and well-balanced cover
story for Business Week on the new era of cheap credit. Yes, there are some
risks involved, but let’s not lose track of the big picture, he says: the benefits
are even greater.
The low cost of capital is probably going to last "five to seven years,"
says Samuel Zell, who as chairman of real estate firm Equity Office Properties
Trust (EOP ) watched bidders wield cheap debt in a fight over his company.
(Blackstone Group, with a $39 billion bid, won out on Feb. 7.) James W. Paulsen,
chief investment strategist at Wells Capital Management (WFC ), sees an even
longer horizon: "This could be a prolonged cycle where the cost of capital
is low [for] 10 or 20 years."
It is, indeed, a low, low, low-rate world.
Easy money is creating all sorts of economic benefits. Corporations are making
capital investments again—and with their borrowing costs so low, profits
are still zooming. Private equity firms are using loads of cheap debt to buy
companies at jaw-dropping prices. Even the housing market, which boomed for
five years on cheap money, hasn’t fallen apart. It’s gliding to a soft landing
rather than a hard crash, allowing consumers to keep spending. "We are
in this era where financial innovation and product structuring, particularly
in the debt markets, has been very stimulative," says Henry H. McVey,
chief U.S. investment strategist at Morgan Stanley (MS ). Zell puts the state
of rates in similar terms: "I think that’s going to be a growth accelerant
around the world."
There’s even a sidebar
specifically on the property market, and that, too, is balanced and constructive
– to the point where, almost uniquely for a mainstream publication, something
nice is said about the CDS market!
So this is the much-feared "housing bust"? Bust Lite is more like
it. Existing-home prices are as high as they were a year ago, while sales
have receded only to 2003 levels. The only extreme decline is in construction:
Builders are trying to get rid of the houses they’ve already built before
they put up more. The overhang of unsold homes could be back to normal by
Low rates are still keeping a floor under housing. Thirty-year mortgage rates
are no higher than in June, 2004, even though the Fed has since pushed up
the federal funds rate by 4.25 percentage points. It’s the same in Britain,
where long-term rates have actually fallen since 2004 despite short-term rate
hikes by the Bank of England. No surprise: After a brief lull, Britain’s housing
market is booming again…
Credit default swaps, which let people bet for or against a bond or loan’s
creditworthiness, have also improved transparency. If investors bet heavily
against an issuer’s securities, its lending costs are driven up. "This
pushes out the marginal lenders," says Whalen. That creates a healthier
market—and ultimately, lower rates.
So when the likes of Dan Gross
and Nouriel Roubini
tell you that the sky is falling, just remember that low interest rates
are a good thing – and that people who think they can time the market
are nearly always wrong.