END OF DECEMBER ECONOMIC UPDATE
Written by: Harrison LaHaie
What’s in the News
U.S. stocks closed their worse year since 2008. The decline in stock prices has been a result of economic concerns regarding high inflation, COVID, interest rate hikes from the Federal Reserve, and the Russian invasion of Ukraine. China continues to conduct military exercises after a close call with a U.S. spy plane. U.S. jobless claims rose to pre-pandemic levels last week but have not yet shown a real increase, signaling the labor market remains strong. Durable goods orders fell by 2.1%, greater than the consensus expected of 0.6%. Sam Bankman-Fried of the failed crypto exchange FTX managed to post $250 million bail, further raising concerns of fraud.
What's Next for CRE
Prequin, an investment data company, issued a survey which found that 74% of investors believe that real estate assets are overvalued. This is an interesting indicator of where many people see the market going. With values still elevated relative to pre-pandemic, the higher interest rates due to the Fed’s hikes make these high valuations untenable. Fund managers surveyed believed that values will have to come down. This puts CRE in a precarious position if a recession comes in the next 12 months. With high rates putting downward pressure on value, a recession could lead to lessened demand from tenants. Still, there is time for valuations to come down to meet the current interest rate environment.
Asset prices have come down significantly, as evident from the drop in stock prices. However, there may be more asset price deflation to come as M2 money supply growth reached its lowest amount since 1960. The slowdown in M2 is deflationary for asset prices. Alongside a decrease in the growth of M2 is the Fed’s balance sheet continuing to decline. With money supply slowing and the Fed’s balance sheet shrinking, the economy must begin to slow down. To what extent the economy will slow down is hard to say. As inflation comes down, real income will increase which may buoy the economy. However, interest rates remaining elevated for an extended period will have to work their way through the economy. As seen from the decline in orders for durable goods, demand may begin to wane.
Sources: Globe St, WSJ, First Trust, Federal Reserve.