Peter Linneman On The Economy: Keep Calm And Carry On
Business leaders such as JPMorgan Chase CEO Jamie Dimon are predicting the U.S. economy could easily slip into a recession, but Peter Linneman, founder of CRE advisory firm Linneman Associates LLC, has a prescription for making it through the turmoil: practice patience, avoid shiny objects and don’t worry so much about interest rate increases.
Dimon and many others have voiced concerns about the impact of the Federal Reserve hiking interest rates to tame the economy. Speaking with host Willy Walker on the Walker Webcast this week, Linneman said he understands the concern about rising rates — taken to the extreme, it can echo the old workplace joke that “beatings will continue until morale improves,” he quipped.
However, a strategic application of rate increases is just what the economy needs, Linneman said.
“Should things that are valuable have a zero price if what you're trying to do is maximize resource efficiency?” Linneman said. “The answer is, ‘Of course not.’ Something that's valuable should not have a zero price because it will get overused. Interest rates going up, at least to a certain point, gives a better signal of where money should be flowing. And that will enhance economic output.”
Linneman said that even as banks like Dimon’s raise red flags, they could take steps to potentially juice the economy by opening up the lending spigot.
“They have their hands full of money, and of course, they're human, they want to make their bonuses,” Linneman said. “If they had no money, I couldn’t tell you that they'll start lending. But I know they have money because all you have to do is look at their reserve positions in the Federal Reserve reports. They have stunning reserves.”
He said he believes most markets will achieve supply-and-demand balance within the next year if the rate increases are allowed to work. As a result, inflation will recede, he said.
Walker questioned why Linneman seemed unfazed by the fact that real gross domestic product fell in the first two quarters of 2022.
“Your response to that is: ‘If this is a recession, I want it to last forever,’” Walker said. “If this is such a great time, why are the markets so pessimistic?”
Linneman, who holds master's and doctorate degrees in economics from the University of Chicago, agreed that markets dislike uncertainty, and investors and consumers are understandably spooked when they read that billions of dollars in wealth have been wiped out in the markets this year. But statistics like that miss the bigger picture, he said.
“Another way to look at it is that our real wealth is unchanged,” Linneman said. “What do I mean by that? We have the same stock of human capital, we have the same stock of physical capital, we have the same stock of people who are creative, and all that didn't change. That's the real wealth of the country, and I'm not being cute.”
Linneman’s advice to investors is to avoid being distracted by “shiny objects” such as the upcoming election and the impacts they might have on the economy.
“Don't get distracted,” he said. “Focus on the asset, focus on the fundamentals. And I think if you do, [you will find] this is not such a bad time.”
Linneman is bullish on most CRE asset classes — except for senior housing, whose time has not quite come, he said. The baby boomers are aging, but today’s healthier lifestyles mean they can live independently longer.
At nearly the opposite end of the generational spectrum, Linneman, a professor emeritus at the Wharton School of the University of Pennsylvania, said his advice to young people is that now — in spite of the economic uncertainty — is actually a great time to get into CRE.
“To this day, I still advise students that the worst time to get hired is at the peak of the market because once you're there, you think it's great, and then in a year and a half, two years, it’s gone,” Linneman said. “With hindsight, the best time is when it’s at the bottom. That’s because everybody's humble and the people you get hired by have figured out how to survive, and so you're learning from survivors instead of wild men. And you just have a better environment, although it's a more painful environment for a couple of years.”
If Linneman’s assertion that rising interest rates will enhance economic growth materializes, then those young CRE professionals can eventually look forward to an improving economy as they begin to move up the ranks at work.
That is, if they don’t allow themselves to get distracted by shiny objects.
The next Walker Webcast will be on Oct. 19 with Diana Walker, an award-winning photojournalist and former Time Magazine White House photographer — and Willy’s mother. Click here to register. The discussion will take place at the Walker & Dunlop Women’s Summit.
This article was produced in collaboration between Walker & Dunlop and Studio B. Bisnow news staff was not involved in the production of this content.
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