Load up on assets: Dr. Peter Linneman on inflation, job growth, interest rates, and more

Renowned economist Dr. Peter Linneman once again dazzled us with numbers. He and Willy spoke about everything from COVID recovery and job growth to inflation and the CRE industry's path forward, with data to back up each assertion. As per usual, it was an hour filled with insight!

Today's episode features another discussion with Dr. Peter Linneman, Principal of Linneman and Associates. To begin, Willy and Peter discuss predictions for the labor markets in light of federal unemployment benefits expiration. Though it was a well-intended policy, people were simply not enticed to rejoin the workforce and give up the benefits. Had Covid never reared its head, the GDP would have been about 4% higher. Peter expects the GDP to grow between 4.5-6% higher and the addition of 6 million jobs in the coming year. 

Next, they touch on one of the most discussed topics of the moment: inflation. In July, inflation was about 5.1%, but 20% of that number was due to used cars. After doing some research, Peter discovered the role car rental agencies, who pivoted to selling their used car stack once the pandemic hit, played a major part in this. In comparison to the early stages of Covid, when people weren't interested in buying new cars, the demand for used cars is now disproportionately high, and the supply is abnormally low. While this model won't last forever, it will take time to find the balance between supply and demand. Housing, however, is a factor within inflation that is not transitory as housing has been underproduced for the previous 20 years. 

Peter shares there is likely stickiness around wages to come, seeing as many large companies such as Amazon have drastically increased their pay. Since the change has already occurred, he says this won't further impact inflation. Although there is no major population increase in the U.S. right now, Peter is firm in that we are undersupplied in housing. As home prices continue to rise, buyers are challenged by large down payments. While the national savings rate is going down, early deaths due to Covid still are giving bequests to many. 

Since American household debt peaked in 2007, it has been going steadily down. Now, we are at a point where disposable income is at a 40-year low, and cash deposits are at a record high. Prices are up, but Peter believes greed is no longer winning as it was during the beginning of the pandemic. The great financial crisis completely changed the paradigm around debt forever, shifting the focus to be around coverage rather than LTV. 

If you hold long-term unleveraged, gaps in performance are notable but not stagnant. Once you add leverage and shorten the time period, you will see issues arise. Ultimately, time cures a lot of problems. The multifamily housing market has one truly unique advantage, which is Freddie Mac and Fannie Mae. This sector has more depth and predictability than any other. 

Then, they discuss interest rates all across the board. Fixed or float, Peter believes interest rates are unlikely to move drastically as central banks won't raise them on the short end. On the long end, the banks will stop buying at some point, putting less support under the treasury market and driving up intermediate rates slightly. We now live in a world in which you have to pay the government to make sure they give your money back. Next, Willy asks Peter whether he is concerned over the current national debt. His concern lies not within whether the U.S. can afford this but in the question of getting our money is worth in the $5 million owed. 

Finally, they discuss the current presidential approval rating, which is right in line with both Clinton and Reagan's approval during their first terms. Peter reiterates that while it will take time, the economy will continue to grow, and redistribution is not growth. 

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