January 6, 2014
Senior Housing Participants Should Move to Take Advantage of Current Low Interest Rates
Due to a combination of factors, short and long-term interest rates have been at, or near historic lows since 2008. These low rates helped drive the economy out of the recession in 2009, and have contributed to its continued growth since then. However, economists are now predicting that after years of low interest rates, they will finally begin to rise in 2014. Accordingly, senior housing owners and operators should move to take advantage of today’s current low interest rates.
Reasons for Low Long-Term Interest Rates
The 2008 recession forced the Federal Reserve (Fed) to take extraordinary measures to lower interest rates in an effort to boost the economy and end the recession, and although the recession officially ended in 2009, the Fed has continued to take these measures to continue to stimulate economic growth. The primary lever the Fed has used to keep long-term interest rates low has been its quantitative easing program. Under this program, the Fed purchases bonds from its member banks; this gives the banks excess reserves, which they then lend out at lower interest rates.
The Fed implemented its quantitative easing program in 2008 and it is currently in its third iteration, which is known as QE3. Under QE3, the Fed was purchasing approximately $85 billion in bonds each month from its member banks. It constantly reviews the program to determine whether it should continue to maintain this purchase level, or if it can begin to “taper” the program.
Why Long-Term Interest Rates Are Projected to Increase This Year
The Fed has been using quantitative easing to keep long-term interest rates low since 2008. However, in December it announced that because of positive economic indicators, such as better than expected job growth and gross domestic product figures, it would begin tapering QE3 this year. Beginning this month, the Fed will reduce the amount of its monthly bond purchases from $85 billion to $75 billion. This in turn will reduce the amount of excess reserves that banks have to lend out and will cause long-term interest rates to rise.
Indeed a recent article in Kiplinger’s noted that because of tapering, “the impact on interest rates is likely to be a gradual rise in long-term rates…” Further evidence of tapering’s effect on long-term interest rates occurred the day the Fed made its announcement, as long term rates immediately rose by 10 basis points.
As the Fed continues to wind down QE3, long-term interest rates will continue to increase. Accordingly, senior housing owners and operators should move to take advantage of today’s low rates and lock in cheap capital for their financing needs.