The economies of New Hampshire and the nation are headed in the right direction, but soaring prices for commercial real estate, especially apartment buildings, present uncomfortable echoes of New England’s financial crisis from a quarter-century ago, a Federal Reserve official told Concord business leaders Thursday.
“We had an experience in New England not too long ago, a real problem. . . . You may remember – I see silver hair in the audience,” joked the silver-haired Federal Reserve Bank of Boston President Eric Rosengren in a luncheon talk to the Greater Concord Chamber of Commerce on Thursday. “There were a lot of bank failures, including in New Hampshire, that had a widespread effect on the economy up here.”
Rosengren’s reference to the financial crunch of the early 1990s, which saw more than a dozen New Hampshire banks go under and the state’s unemployment rate rise well into double digits, came as a cautionary note in his generally upbeat assessment. It helps explain why the Federal Reserve has not repeated the uptick in interest rates it made in December.
“There really has been a very significant appreciation. In Boston, as you’ll know if you have a son or daughter there . . . millennials in a 600-square-foot apartment are paying an outrageous amount for that apartment,” Rosengren said.
“Why would I be worried about commercial real estate? It’s important from a financial stability standpoint,” he said. “In a situation where you have an asset that you take debt out on, that tends to be volatile – if that asset go down in value, not only does the owner have a problem but so does the person who provided that loan, particularly if it is a leveraged financial institution. That’s is what we saw throughout New England in late 1980s early 1990s.”
He accompanied the talk with a chart showing an index of repeat sale prices – that is, prices of buildings that had been sold at least one time previously – for four categories of commercial real estate. All categories have increased sharply since the Great Recession, but apartments have increased the most, which is not the pattern of recent decades.
“It’s not just a U.S. issue. When you see real estate values go up very, very rapidly throughout the world . . . when those prices go down, there tend to be repercussions, credit crunch issues,” he said. “It if continues, it would be a concern.”
Most of Rosengren’s talk was more upbeat, however, as he walked through data showing that national unemployment rates are inching down to point that some would consider full employment, and that wages are finally starting to rise.
“One of the puzzles since the Great Recession as to why we aren’t seeing any wage growth,” said Rosengren, who described himself as being more focused than some other members of the Federal Reserve on increasing employment compared with controlling inflation.
He also noted that a measure of underemployment called U6, which includes people who have gotten discouraged and stopped looking for jobs as well as people who are in part-time jobs but want full-time work, remains above 9 percent nationally, almost double the traditional unemployment rate.
It’s possible, he said, that this and the wage paradox reflect structural changes in the economy fueled by new businesses like Uber and Airbnb, which can provide outside income but may also make it harder to find traditional employment.
“People may be stringing together part-time jobs, going from more common full-time jobs to part-time jobs,” Rosengren said.
As for those in the audience looking for hints about whether the good economic news would lead the Federal Service to raise interest rates this year, Rosengren said the bank tended to be more cautious raising rates, as compared to cutting them, for good reason.
“Our goal is to make sure that we don’t have a recession – one way is to make sure you don’t overcompensate. . . . When we try to put (the rate) up, we tend to cause recessions rather than getting the unemployment rate to go up just a little bit,” he said. “It’s not like a thermostat in your house. Economists aren’t that precise.”
