Real Estate

A Bet on the Fed with Dr. Peter Linneman

October 2, 2024

A Bet on the Fed with Dr. Peter Linneman

Dr. Peter Linneman

Leading Economist, Professor Emeritus, The Wharton School of Business

Linneman tip: not recognizing that you’re overpaying can be a costly mistake, so it’s imperative to stay vigilant.

Fan-favorite Dr. Peter Linneman recently returned to the Walker Webcast for a chat about everything from his latest Linneman Letter to the upcoming presidential election. Peter is the principal of Linneman Associates and the CEO and founder of the American Land Fund and KL Realty.  

What’s going on with mortgages and employment?

People from both sides of the political aisle are painting very different pictures of the economy this election season. The Walker Webcast likes to remain apolitical and focus on the numbers at hand. So, naturally, we had to walk through some of the most interesting figures Peter put out in his most recent letter.  

In this quarter’s Linneman Letter, Peter pointed out that over the past 12 months, the U.S. has added roughly 2.4 million jobs, adding over 709,000 people to the labor force.  Real retail spending has increased by roughly two percent, and mortgage applications were up nearly 25 percent, despite industrial outputs being roughly flat.The letter mentions  the unemployment rate average of 3.9 percent. Debt service remaining low, with many homeowners and businesses alike having locked in cheap debt over the past few years.  

Although people may be trying to paint different pictures to fit their narratives, these numbers are representative of a pretty healthy economy, especially when you factor in that GDP has remained positive.

The causes of low consumer confidence

As you might know, consumer confidence has fallen precipitously during Biden’s presidency.  Although many thought that was due to the difference in perception of Trump and Biden, Peter proposes a different culprit. He believes that the drastic drop in consumer confidence can be attributed to the ever-increasing regulatory burdens that have recently weighed heavily on small business owners.  

The current administration has been very heavy-handed when it comes to passing rules and regulations for different sectors. When regulations are passed, oftentimes higher levels of reporting and compliance are required, which take up manpower.  Adjusting to changing regulations is often relatively easy for larger businesses, as they often meet (or are close to meeting) these standards anyway.  However, small businesses simply don’t have the scale and leverage that larger businesses have, making it difficult to adapt to changes in the regulatory landscape.  

Has the recovery in office space begun?

There have been quite a few headlines coming out lately that employers are requiring all employees to return to the office full-time. While that has certainly resulted in some disgruntled employees, this has been music to the ears of commercial real estate investors. Although we’ve seen quite a few announcements from businesses like Amazon, Peter thinks that there’s going to be an even bigger announcement once we have elections in the rear view mirror.  

Peter believes that a lot of government employees will be required to return to the office as well.  This, of course, should bode well for commercial real estate, as well as the businesses that inhabit the metropolitan areas of major cities across the country because, when commercial real estate investors suffer, many downtown areas turn into ghost towns with the substantial decrease in office-related foot traffic.

Should we be concerned with rising credit card debt?

Credit card interest rates are currently at some of the highest rates ever.  Likewise, we’ve also seen credit card debt and delinquencies spike amongst consumers, which is never a good sign.  However, Peter and I believe that this results from people simply using credit cards increasingly more often over time.  Most people are not paying their cards off in full before their statement closes, so the total amount of outstanding credit card debt is bound to increase over time. It’s pretty safe to assume that credit card debt levels will rise, as more and more people pay with credit cards and/or shop online.  

Will we see three rate cuts?

Peter always makes his predictions for the new year. One of the edgiest predictions he made at the start of 2024 is that we would see three rate cuts by the end of the year. So far, we’ve seen one significant rate cut in September, and given the fact that there are only two more Federal Open Market Committee meetings until the new year, we’ll have to see rate cuts come from both of them for Peter to be correct. Although Peter did not directly comment on whether we should expect rate cuts at both of the upcoming meetings, he did seem quite confident that he would be victorious in our friendly wager on the number of rate cuts we’ll see.  

Dr. Linneman’s suggestions for readers

Before we wrapped up our conversation, Peter wanted to give everyone a tiny tip that could save everyone a lot of money.  We’re going through a rate-cutting cycle, so those with floating rate debt should see their payments go down over time. If you have floating rate debt and aren’t seeing your payments actively decrease, then it might be time to call your lender.  Peter mentions that he’s seen this phenomenon many times throughout his years. Unfortunately, not recognizing that you’re overpaying can be a costly mistake, so it’s imperative to stay vigilant.

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