Interest rates will head up, marginally

To understand the influence that low interest rates have had on the Northern Colorado economy, drop by either the Foothills Mall in Fort Collins or the Twin Peaks Mall in Longmont. Both have changed ownership and are planning huge renovations.

Northern Colorado real estate is becoming an attractive investment once again. Meanwhile, vehicle sales are booming, unemployment is dropping, the housing industry is showing life, consumer confidence is on the rise, and money is flowing into the region from outside sources.

All at least partly due to low interest rates. The question is: How long will historically low interest rates — a 30-year fixed-rate mortgage can be had at about 3.56 percent at the moment — remain at levels that are fueling the region’s economy?

The answer appears to be: At least for another year, and probably longer.

Rates have been inching up at a slower pace than many experts predicted, and while 4 percent seemed a reasonable topping out point for 2013, the federal government is determined to keep rates low until consumer confidence has been restored and more unemployed Americans are back to work.

This message came through loud and clear from no less a master of interest rates than John Williams, president of the Federal Reserve Board for the San Francisco region. In a speech Feb. 21, Williams pointed to the effect that the Obama administration’s low-interest-rate monetary policies have had on the economic recovery.

“The positive effects of monetary policy can be seen in two rate-sensitive sectors, autos and housing, that are now contributing to the recovery in big ways,” Williams said.

Williams promised that rates would be kept on a short leash in order to continue to stimulate consumer demand and create more jobs. “I anticipate that (federal government) purchases of mortgage-backed securities and longer-term Treasury securities will be needed well into the second half of this year,” he said.

A few days later, Williams’s boss, Ben Bernanke, vowed the Fed would “stay the course” on low rates until the unemployment rate reached an acceptable level.

That comes as welcome news indeed to local businesses whose profitability is tightly tied to interest rate levels.

Rates have played a particularly positive role in attracting investors to large commercial real estate projects, says Steve Kawulok, managing director of Sperry Van Ness in Fort Collins, specialists in commercial real estate transactions. But the money is coming mostly from insurance companies, he reports, rather than more traditional lending sources.

“Traditional lenders are anxious to lend to owner-occupants. They’ve been less anxious to lend to investors,” he said. That’s because scrutiny of investors is still intense in the wake of the real estate meltdown.

Investors such as insurance companies are willing to take on more risk than banks. They tend to want to invest for longer periods of time, and they are willing to accept more risk in return for the higher yields on projects valued at $5 million and above. As long as the spread between what investors pay for money and what they can earn back on that money remains in the 3 percent to 6 percent range, investors are going to look to real estate as one area where they think their money will do well, he said. Hence the spate of shopping mall sales and planned renovations in Northern Colorado.

“Insurance companies know they can get higher yields from certain types of properties — but just the larger commercial properties that are in good locations with good tenants.”

Rates are destined to continue to creep upward, Kawulok said. “The key is marginally,” he said. “No sudden shocks to the system while the system is still pretty reactive. As long as the increases are marginal and not dramatic and incremental, I think probably our general uptick will hold.”

On the residential front, low interest rates combined with historically low vacancy rates for rentals are boosting home sales. Home values in Northern Colorado are recovering more quickly than in many other parts of the nation. The result: More people here can buy and sell houses again. With rents at a premium, many renters are decided to buy to lock in the crazy low rates.

“We saw home transactions rise 20 percent last year, and they’re up 20 percent so far this year,” said Eric Thompson, president, The Group Inc., Fort Collins. While he expects transactions to cool by year-end, with perhaps a 10 percent increase for 2013, that would still represent a strong showing for a market that was dead in the water two years ago.

“As interest rates gradually increase, it spurs people to buy now,” he said. “At what point rate increases would deter transactions is hard to say. They’re just so far below the historical average of around 7 percent that there’s a lot of room for upward movement.”

The increased rate of transactions is also reviving the homebuilding industry, Thompson said, as homebuilders expect demand for new homes to start to build this year.

Vehicle sales have been booming in recent months as consumers with access to cash are throwing it down on new cars and trucks.

Tim Jackson, president of the Colorado Automobile Dealers Association, reports that vehicle sales in Colorado are outpacing the increases seen elsewhere in the U.S.

Sales were up 22 percent for calendar year 2012 over 2011, he said, and the early returns for 2013 suggest that pace will continue. “Consumer confidence is rebounding,” he said. With fewer homeowners “upside down” on their mortgages, they are once again dipping into home equity to finance a new vehicle.

Additionally, lenders are easing up on lending requirements, he said.

”Not only are the loans more readily available but they are less expensive,” he said. “Interest rates are much, much lower, especially on new cars. It used to be someone with CD credit might pay 12 to 16 percent on their cars. Now, someone with 580 or less score or C credit can get a loan for 6-8 percent. The climate is just so much better.”

Some bankers continue to cast a wary eye on rates. Mark Bower, executive vice president, CFO and COO of Home State Bank, believes the Fed will keep rates artificially low “for the duration” of 2013. But he’s not a fan of the policy. Maintaining rates at current levels only invites another economic disaster, he believes.

”When (Fed Chief Ben) Bernanke says there’s no way he’s helping to create another asset bubble by staying the course on these low rates, I find it hard to believe,” Bower said. “He’s hurting a lot of people, the savers, by keeping rates artificially low.”

Bower said Home State will continue to pursue a conservative approach to lending, to shield its customers from interest rate risk.

Likewise, Shawn Osthoff, president of Bank of Colorado, says his institution will chart a cautious course.

“Our main strategy is to be consistent in up and down markets. Our loans are priced on a variable or five-year fixed rate. That is what most of our banks are doing. Further than that, we take on interest rate risk.”

Osthoff was reluctant to forecast where rates might wander. “We’re not betting on which direction rates will go. We’re not very good at it,” he said.

Would a significant upward movement be unexpected? “That would surprise me,” he acknowledged. “But never say never. However, it would take a drastic change in our economy to see a huge swing.”

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