Fed needs to take interest rate stand to promote multi-family construction

May 10, 2012 03:30PM

Conditions are ripe for the construction of new multi-family housing in the United States, yet the rate at which those properties are being started is still well below where it’s been for most of the last 50 years. A Slate columnist blamed this phenomenon on the Federal Reserve’s inability to make a commitment to the direction interest rates will be steered.

There’s little doubt that there’s need for more multi-family housing. Builders are unemployed at an elevated rate, the U.S. population is growing and rents are rising because mortgages for home purchases remain difficult to secure.

Yet developers say they aren’t moving forward with multi-family projects because they can’t obtain a loan. Lenders are hesitant to park large sums of money into low-yield financing for development, as they’re worried interest rates will rise. If the Fed were to say that interest rates would remain low “come hell or high water,” the columnist argues, investors wouldn’t fear sacrificing that liquidity.

Instead, the Fed has said only that it’s unlikely anything will occur that would lift interest rates above their current state — a statement that seems to imply the economic downturn will continue. And that uncertainty generates a high preference for liquid investments. [Slate]