He believes that the unexplained component of the participation rate is cause for concern as we haven’t seen this falling participation rate in roughly 40 years. The political side of the labor markets, particularly the rigidity in the wage force and difficulty of acquiring new skills, is weighing on the numbers.
Housing Starts Lower than 1930
Housing starts during the last recession fell to the lowest level even when compared to the 1930s and the 1970s and ’80s, which were characterized by double-digit interest rates. Many claim that housing starts need to be close to the 1.5 million level (average since 1947) in order to satisfy growth of population and formation of new houses.
Chandan made a point about how remarkably slow this recovery has been. Levels of new single-family houses are not consistent with well-functioning single-family homes. Growth numbers are dominated by multifamily housing and almost exclusively rental units. More young people want to live in the city today, and what’s more, empty nesters are indicating that cities are not a bad place to live for their cultural benefits. We are seeing a change in people’s attitudes about the urban environment and a shift in leasing activity toward urban areas. That Google’s East Coast headquarters is right in the middle of Manhattan is testimony to attracting talent in urban areas.
Ben Bernanke Started Blogging: Why Are Interest Rates so Low?
Former Fed Chairman Ben Bernanke remarked in a blog post recently that if you ask average people on the street why interest rates are low, they’d respond that it’s because the Fed is keeping them low, and it is punishing savers. Bernanke retorts this is true only in a very narrow sense, and much bigger forces are at work.
Siegel believes rates are low due to fundamental factors, such as lower normal growth and pension funds derisking due to new regulations. Siegel believes Bernanke’s blog is right on, and pointed out that Bernanke and Alan Greenspan (chairman of the Federal Reserve between 1987 and 2006) penned a piece on how the savings glut in Asia 10 to 15 years ago helped to bring rates down.
Chandan added that low rates have spurred the boom of the commercial real estate sector, which tends to be largely debt driven. The absence of yield in low-risk investments has encouraged strong inflows. Real estate presents an interesting challenge as there is a supply constraint. If capital flows in, and leverage is attractively priced, it has tended to increase asset prices, especially since global investors may see the U.S. as a safe haven.
Read the Conversations with Professor Siegel Series here.