‘The Accidental Economist’ with Jack Kern: Provando et Riprovando

The Federal Reserve has been without a discernible rudder ever since the royalty that was Alan Greenspan left. Without so much as a nod to the current chairman, Greenspan has been out touting his success as the previous Fed chair, giving speeches and publishing books about the great run up in the economy prior to his inexorable exit.

Now perhaps, some history is in order. The Federal Reserve recently released the minutes of its March 15 meeting, where they had a protracted discussion on housing policy and quantitative easing, both of great interest to property owners and capital markets. It seems the Fed will aver to the position of maintaining the final phase of QE2, the last part of the current round of expansionary monetary policy started near the end of last year. With weak housing markets and difficulty in obtaining financing for commercial properties part of their discussion, the Fed seems to acknowledge what we have been saying all along. Fed monetary policy failed to control the run up in home prices and massive numbers of apartment units converting to condominiums for a very good reason. They couldn’t. The Fed, as global markets go, lost control of the money supply.

Under Chairman Greenspan, the laissez-faire policies of the previously much-more-obscure Fed provided an opening for international investors to come into the U.S. market and purchase special-purpose vehicles of all kinds, debt or mortgage securitized, and ultimately provide the excess of capital that ran the real estate market squarely into the crash of 2007. Now the Fed, under Ben Bernanke, is left without a lot of room to change this. What we’re seeing is the result of both the dissolution of how CMBS used to work and a rebirth of sorts in the new securitization of debt and mortgage paper.

So what does this March 15 meeting portend for commercial real estate markets? As a voracious user of capital, commercial property markets ultimately depend on the health of capital markets. Since only the largest REITs, publicly and non-publicly traded, have ready access to capital, cap rates will continue their modest compression, new construction will remain slow to begin in most places, and current assets in place should see increasing values. What we probably won’t see is QE3. It does seem that the Fed is more apt to model Greenspan’s hands-off policy for now, and there is little political will to do much more given the budget deficit. It may just be that this strategy works best of all. And as for Galileo Galilei’s quote at the outset of this post, it means “try and try again.”

Jack Kern is the managing director of Kern Investment Research, LLC, a Washington D.C.-based research consultancy specializing in commercial real estate forecasting and analysis. Having been criticized by some Fed governors for his views on their lack of perspective, he must be doing something right. Jack can be reached at jkern@kernirc.com or 301-601-1900.