terriemagazine_fall2021_digitaleditionfile

A Conversation with Leading Real Estate Companies of the World Chief Economist Dr. Marci Rossell

Q. After the turmoil of the last months, what advice do you have for investors? One of the strongest pieces of advice I can offer is that is extremely important to revisit what your portfolio looks like. Given the big movements in the value of assets over the last year, I recommend that people review and rebalance their portfolio of stocks, bonds, real estate, and cash and evaluate if you have the proper asset allocation for where you are in the lifecycle.

Q. How has the pandemic impacted consumers from an economic perspective? It shifted the ground between savers and borrowers, where savers are in a much better position. They tend to be people who are older, generally Baby Boomers and late Gen Xers who are beyond the age in which they have student loans. The savers of the world have been enjoying a time with low inflation and low interest rates, coupled with really strong stock market appreciation over the last two or three years. They are sitting on a lot of cash and pouring it into the housing market.

Q. Why is that? In some ways, they are doing so in an effort to diversify holdings. One of the things that happens with people who end up with so much stock market wealth is they look around and think, “Where else can put my money?” People still believe the housing market is one of the safest investments around over the long haul. And,you can get some use of it over time, which you cannot get from the stock market. .Q. Do you expect a rise in interest rates? We know interest rates are tied to the inflation outlook, and the Federal Reserve in the U.S. and central banks worldwide have expressed that they are willing to tolerate inflation running above the normal 2% target for an extended period. I think that means we are looking at potentially higher interest rates in the years to come. That does not mean mortgage rates at 7 or 8%; it just means a bit higher than what we’ve come to expect. We also know the Federal Reserve is most likely to cut back its support for mortgage-backed securities first. They’ve been intervening in and purchasing mortgage-backed securities since the pandemic began. I believe they will wean back their support of markets, and when they do, they will start with mortgage-backed securities given that the housing market is so strong. All of this taken together, I believe the lows in interest rates are behind us, but that does not mean they will be high by historical standards.

Q. Is inflation on the rise? First, I think it’s important to consider what inflation is. We all understand that, in general, it means rising prices overtime. Things like houses and colleges go up faster than average, but things like technology tend to go down. Average all things together, and we get an overall inflation number that captures the prices of all the goods in all the markets. The average in general tends to go up because the economy tends to be growing. The Federal Reserve and central banks worldwide provide the currency, and the amount of those notes needs to grow at the same pace as the economy, so we have enough of the paper we need to pay for things. The job of the Federal Reserve and central banks is to get the paper to grow as the economy grows. If the paper grows over the rate of the economy, that’s when we have hyperinflation, when the government prints so much money that everything begins to increase in value, not 1 to 3% a year, but a 100% a year, for example. During the pandemic, we saw a period where the prices of everything collapsed because demand collapsed. Now we have more normalcy, and we’re seeing prices go up. For a lot of things like lumber, semi-conductors, and used cars, we’ve seen high rates of inflation. The government is not concerned about market-specific dynamics, where there is a mismatch in supply and demand. They care about the underlying rate of inflation. At a time like this, it’s hard to distinguish between the two. Is it market mismatch, or is there a long-term problem? It is important for policymakers, and for you and me, to understand is it temporary and/or individual market driven dynamics? For example, is it a toilet paper/hand sanitizer issue that will go away quickly, or is it a long-term issue that will require the government to take steps like raising interest rates aggressively? I think most central banks around the world are going to let the dust settle. They can’t see the forest right now through all of the trees that are growing at different rates.

Q. What other ways did the pandemic impact the economy? I found it fascinating how the pandemic uncovered market dynamics that we took for granted. Most people have no idea that semi-conductors are produced by a handful of firms globally, and the biggest one is in Taiwan, for example. Because a big chunk of the world’s semi-conductors, which are now used in so many things, come from the tiny island of Taiwan, any disruption reverberates across the globe. We all understood globalization in theory prior to 2020, but we had a lesson in globalization handed to us at our front door.

Q. Are we seeing an economic recovery worldwide? First of all, the pandemic is not over for the globe. For those of us who are U.S. centric, life has returned to some version of normal. The U.K. economy is 9% smaller than prior to the pandemic. Australia is 1% larger than it was. U.S. and China have surpassed pre-pandemic levels. Even though housing markets worldwide have done well, when you look at economic activity on the ground, it is an uneven recovery. Different economies are improving at different rates, and expect that will be the case for the next year. This will have ramifications for central bank policies. Central banks, which have all been doing the same thing the last 18 months, will diverge,and believe the story globally the next year will be big movements in exchange rates. When international home buyers come into a market, they may see a very different exchange rate than prior to pandemic. This will vary country-to-country, as will the pace of the recovery that leads to the normalization of monetary policy. The U.S. should raise rates quicker than Europe and the U.K. China is recovering quickly as well, even in the face of continued tariffs and trade restrictions between the U.S. and China, which have not changed under the new administration. From a trade perspective, it’s as if the pandemic and trade wars of 2018 and 2019 never happened.

Q. What predictions do you have for the economy looking a head? Six months from now, expect interest rate differentials among central banks will be driving big movements in currency markets. Even before that, we will see unevenness in economic recovery, particularly if you look at the pace of vaccination, which has slowed in some countries, but picked up in others. 2022 will be a year of catch-up, with six months of divergence, followed by convergence. Supply chains will start returning to normalcy, which will fuel the recovery in new home building. Given the strength of demand for housing, this should help take pressure off prices, so we should see improvements in affordability overall.