Has Fed Policy Pumped Up Another Real Estate Bubble? (Video)

The more things change, the more they stay the same.

After pumping up a real estate bubble in the years leading up to the most recent economic crash, it appears the central bankers and government policymakers may have managed to orchestrate a repeat performance.

Real estate mogul Sam Zell appeared on CNBC recently and hinted that a real estate bubble might be about to pop. The chairman of Equity Group Investments and of apartment mega-landlord Equity Residential said the market for apartment and office buildings in some markets have already peaked.

And they say actions speak louder than words. Well, according to Wolf Street, Zell is selling.

Back in 2007, he once again proved his sense of market timing. As the commercial property bubble was already teetering, he sold Equity Office Properties Trust to Blackstone for $23 billion, not including $16 billion in debt. Then prices crashed, and commercial property defaults hit the banks. As the dust was settling at the end of the Great Recession, he went on a shopping spree. Now he’s selling again, unloading multifamily properties at peak prices on a massive scale just when a multi-year construction boom is flooding the market with new supply.”

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Zell told CNBC the problems all flow from central bank policy and the long stretch of artificially low interest rates.

In the most simplistic terminology, I would ask you the question, if something is free, is it valued? Is it appropriately risked? I think when you talk about interest rates being close to zero now for a long period of time, I’m very concerned about the fact that we have desensitized our business community, and people generally, to the cost of capital. And we know that the cost of capital ain’t free. Every time you defer facing up to the cost of capital, it’s going to catch up to you. That I think is the biggest concern.”

The easy access to cheap money has fueled the construction boom. As an example, Zell mentioned Chicago, where you’ll find developers building a new office building in an area where three stand empty. In an episode of his video broadcast Myth Busters earlier this month, Ron Paul described the Federal Reserve as the ultimate price fixer and explained exactly the phenomenon Zell alluded to:

The price of money – the interest rate they pay – is crucial because if the price is lower, if the interest rate is lower than the market, people make mistakes. Business people make mistakes. Savers make mistakes. Then there is overcapacity, overinvestment and malinvestment…until finally they distort the economy so badly, and they won’t allow the correction to occur. And all they can do is talk about ‘how low can we make interest rates.’”

Zell told the CNBC moderators that this is exactly what has happened in the real estate market.

We have distorted markets. Maybe we have bubbles…I don’t even know what a bubble is, so I wouldn’t want to be the definer of it. But I think that we have too much intervention and not enough market movement in interest rates – and in other assets.”

The Federal Reserve prides itself on being “data dependent,” but as Zell points out, their policy is really based on political calculation.

You know what the problem is? The problem is I think the Fed should have raised interest rates two years ago, and therefore today would be able to make a much more rational decision as to what to do. The problem is that they’ve so deferred reality for so long that I think they have a serious credibility problem if they don’t raise rates. So now we’re talking about raising interest rates because of credibility and not because of economics.”

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