The Future of Interest Rates.. Will They Go Back Down?

Wally Smith:
I saw, I think you might have posted it, interview with Howard Lutnick on in Davos with Maria Bartiromo. It was brief, but he wasn’t forecasting that, okay, we’re going to be back to zero, one, two, 3% interest rates. He was basically saying this new normal is probably what we should expect. It’s probably going to be like the historic normal. How have interest rates changed? Let’s close on that.

Jeff Hertz:
The bond market has had an unprecedented run for basically 40 years since the early 80s. And we’ve basically just been on a long-term interest rate decline, basically coinciding with different economic cycles, whether it was the Fed lowering rates during the great financial crisis or of course during COVID. But I guess I would say first and foremost, Howard tends to be somewhat of a bear. He’s been through some unbelievable times in his helm at Cantor, and so I don’t blame him. And plus he’s a bond guy. The bond guys tend to be a little bit bearish. I think the idea that interest rates are going to go back down to where they were a year ago, they could, and they certainly are factors why that could be the case, but a lot of people feel that given where inflation is, and as you said, a new normal, that interest rates may normalize and stay at these levels for a significant period of time.
I think commercial real estate is slowly starting to adjust to that mindset, and at the end of the day it’s probably not the worst thing for our industry to just cool down. For a while we were running at 120% it felt like, of what was normal. To maybe cool down to 95%-

Wally Smith:
That’d be nice.

Jeff Hertz:
… might be a good thing. Because what it does is it hopefully gives opportunities to more conservative companies who are realistic about their projections and expectations and maybe put some of those players who are saying, well, I don’t understand why rents won’t go up 15% per year, they did for the last four years. Hopefully they go in the penalty box of that aggressive mindset that is just long term not sustainable.

Wally Smith:
Well, and I feel for young people who are, and when I say young people, perhaps younger than 30, they’ve never seen what you and I would consider a normal market. But in Austria in 1966, my family built a home in Naperville, Illinois. Interest rate was 5.5%. And then they moved back. My parents moved back to New Jersey in 82. Remember interest rates in 82?

Jeff Hertz:
Like 12.

Wally Smith:
I think it was 14 to 16% is what they ended up having. Unfortunately they worked for Ma Bell and Ma Bell took care of all that pesky interest rate stuff. But I remember my dad saying, man, we are never going to see interest rates at five and a half again. And then what we’ve seen in the last few years has been unprecedented. I think five to six, I would agree with Mr. Lutnick that that’s probably historically more of a normal, and then it gives the Fed room to respond when you do have a crisis of some kind.

Jeff Hertz:
That’s the whole key is, if you don’t have any slack or any dry powder as they say, then when these situations come along, the Fed has no way to react to it.

Wally Smith:
Very good.

Jeff Hertz:
We’re hopefully in a good spot there.