After its June meeting, the Federal Reserve announced that it would continue tapering its quantitative easing program (QE3) by another $10 billion in July. The Fed instituted this program years ago to help drive down long-term interest rates and stimulate the economy. However, even though the Fed has begun winding down QE3, long-term interest rates haven’t risen appreciably yet. Analysts are now debating why this hasn’t happened and when they can expect long-term interest rates to rise markedly. This is extremely important for the senior housing industry because interest rates affect both the valuation of senior housing assets and the cost of capital for prospective buyers of them. When combined with the consistent demand that is being driven by the aging of the population and steady economic growth, the result is a dynamic senior housing market with robust activity taking place in construction, acquisitions, joint-ventures, and mergers. Consequently, it’s important that parties that are engaged in these activities have an idea of where interest rates might go in the future so that they can plan accordingly.
Factors Keeping Interest Rates Low
There are various factors that some analysts now believe are helping to keep long-term interest rates low, even as the Fed continues winding down its quantitative easing program. First, some analysts point to the overall size of the Federal Reserve’s balance sheet as the main factor that is dampening long-term interest rates, instead of the amount of monthly bond purchases it is making under QE3. Because the Federal Reserve is still reinvesting the principal payments it receives from maturing securities, the size of its holdings remains at historic levels even though it continues to wind down its quantitative easing program. If these analysts are correct, then in addition to winding down QE3, the Fed would also have to stop using principal payments to purchase additional bonds in order for long-term interest rates to rise markedly. Second, other analysts believe that other buyers in the marketplace, both in the U.S. and abroad, are stepping in and purchasing more bonds at the same time the Fed is reducing its purchases and that this is helping to keep long term interest rates low. Lastly, relative to other options like foreign and municipal bonds, U.S. Treasuries are still in high demand for investors that are looking for safe assets. As demand for these assets increases, their prices go up and their yields go down, further dampening long-term interest rates.
Financing for Senior Housing Providers is Available
These are just some of the theories that analysts have put forth to explain why the tapering of QE3 hasn’t yet caused long-term interest rates to rise significantly. However, the situation could change quickly if the Fed decides to stop reinvesting principal payments or if demand for foreign and local bonds increases. Accordingly, while long-term interest rates continue to remain low, industry participants and others who are interested in investing in senior housing should contact the Chicago-based financing firm Cambridge Realty Capital to learn more about thefinancing options it offers for acquisitions and other purposes as well.
