The top executive at a senior housing/healthcare lender says borrowers for these types of properties should be able to rely on relatively low interest rates for the foreseeable future, but the long-term outlook is less certain. It all depends on how policy makers balance concerns about inflation, indebtedness and sustainable growth scenarios.
Jeffrey A. Davis, chairman of Cambridge Realty Capital Cos., notes, "The contrarain view is that more robust inflation numbers may not be such a bad thing."
Davis said the Federal Reserve Board is using anti-inflationary monetary policies aimed at supporting a recovery by holding interest rates at rock bottom lows. However, the Fed is also considering inflation targets that would further shape decisions on interest rates or the amount of money that will be pumped into the U.S. economy to spur growth.
Some find this approach worrisome because, at the first whiff of inflation, inflation targets would require the Fed to force interest rates higher, even if the economy is continuing to struggle, he points out.
Meanwhile American have $13.3 trillion in mortgage and revolving credit debt owed, almost twice as high as it was as recently as 1999.
"Paying interest and trying to pay down principal on this debt is siphoning off much of the spare cash people have. Which means the ability of consumers to spend their way out of the current predicament is constrained," he noted.
History shows what changed the dynamic regarding debt after the Great Depression was rapidly escalating inflation, which over time enabled consumers to pay off debts with cheaper, inflated dollars.
"Some are suggesting a 5% annual rise in the Consumer Price Index with a similar bump in wages and asset values would be enough to get things steadily moving forward in the right direction. A 20% general rise in home prices without any other changes would also be enough to unfreeze the economy, they say.
"Less clear is the chain of events that will need to happen in order to bring all this to pass," he said.
