Can The U.S Handle High Interest Rates Past 2024? | Ben Miller

Episode Summary

Executive Summary: Ben Miller argues that U.S. debt problems are less about total debt size and more about debt service versus income, with higher rates exposing vulnerabilities as loans mature. He says the pain is concentrated in floating-rate commercial real estate, especially office and some regional banks, while households with fixed-rate mortgages are relatively insulated.

Main Topics: Debt should be analyzed as a service burden, not just a stock (Priority: 5/5): Miller says the key metric is debt service relative to income/GDP, not debt-to-GDP alone, because debt can be carried if rates are low and becomes painful when refinancing costs rise. Total U.S. debt has grown more slowly since 2008 (Priority: 5/5): He argues the popular narrative of a post-2008 debt spiral is misleading: total debt growth across households, businesses, banks, and government has slowed versus the 1980s-2008 boom. Interest-rate duration risk is the real problem (Priority: 5/5): The discussion emphasizes that short-duration and floating-rate borrowers feel rate hikes quickly, while long-term fixed-rate borrowers delay the pain until refinancing or rollover. Commercial real estate is where higher rates hit hardest (Priority: 5/5): Miller says office and some leveraged apartment properties face negative leverage, refinancing stress, and declining values, with office being the most distressed segment. Regional banks and credit markets are under strain (Priority: 4/5): He describes regional banks as the weak link because they fund long-dated assets with higher-cost deposits and cannot easily compete with big banks’ low funding costs. Housing is bifurcated: households are healthier, but the market is uneven (Priority: 4/5): He sees residential mortgage borrowers as relatively protected by fixed rates, but notes young buyers and renters face affordability pressure while older homeowners benefit from locked-in low rates. Higher for longer implies slower growth and possible crisis (Priority: 5/5): Miller warns that if rates stay elevated, the system may face a delayed but sharper adjustment through defaults, foreclosures, and forced recapitalizations rather than a soft landing.

Key Arguments: U.S. debt must be assessed in totality because public and private debt can be shifted via taxation, money printing, bailouts, and crisis interventions. Total debt growth in the U.S. has slowed markedly since the 1980s and has been roughly flat relative to GDP since 2008. The main constraint is debt service: a 50% rise in borrowing costs materially reduces what households, businesses, and governments can afford. The economy became dependent on a 0% rate regime; as legacy low-rate debt matures, refinancing will pressure balance sheets. Households are comparatively resilient because much of their mortgage debt is long-term fixed-rate, unlike most business and commercial property debt. Commercial real estate is already experiencing distress, but the process is slow because extend-and-pretend behavior delays recognition of losses. Office is the most troubled property type, with obsolete buildings, weak occupancy, and enormous capital needs for redevelopment. Regional banks are vulnerable because deposit costs rose sharply while their asset books are stuck with older low-yield loans and securities. The market is overly influenced by the forward curve and keeps assuming rates will soon fall, which prolongs the adjustment. A recession may actually be beneficial for real estate because it would force rates lower and improve financing conditions more than a strong economy with high rates.

Data Points: U.S. federal debt to GDP: about 120% - Current federal debt ratio referenced in the discussion versus roughly 30-40% in the 1970s. All U.S. debt: about $99 trillion - Miller’s broader measure including households, businesses, banks, and government. Household debt to GDP: 73% - Current household leverage cited as lower than the 2008 peak and below the 1990s average. Household debt to GDP peak: 100% - Referenced as the 2008 peak for household leverage. Debt-to-GDP in 1980: about 0.6x - Used to show how much lower leverage was before the long credit boom. Debt-to-GDP in 1990: about 2.2x - Shows the rise in leverage by the early 1990s. Debt-to-GDP in 2008: about 3.6x - Marks the peak of the long U.S. debt expansion before flattening. Household debt service as % of disposable personal income: lower now than any time in the 1980s and 1990s - Presented as evidence that households are handling debt service well due to fixed-rate mortgages. Fed funds rate increase: from 0% to about 5.25% - Described as the shock that hit real estate and broader credit markets. Mortgage rates: roughly 7%-8% - Current borrowing costs used to illustrate affordability and refinancing strain. Average mortgage rate in the 2010s: about 4% - Used to estimate that current debt service is around 50% higher. Increase in debt service at higher rates: about 50% higher - Illustrative comparison between borrowing at 4% versus 6%. Office building portfolio exposure: one office building - Fundrise’s negligible office exposure compared with its broader real estate holdings. Fundrise cash position entering 2023: $750 million cash on $3 billion total equity - Used to show defensive positioning ahead of the rate shock. Built-for-rent portfolio: about 5,000 homes - Fundrise’s dedicated built-for-rent strategy and scale. Apartment supply growth: new construction down about 90% in anecdotal terms - Miller says greenlighting new multifamily projects has collapsed. U.S. population growth: 3 million people last year - Cited as a bullish demand factor for rental housing. Bank deposits concentration: 75% of deposits at 15 banks - Used to explain why large banks are stable and regional banks are more vulnerable. JPMorgan deposit rate: 0.05% - Example of ultra-low deposit funding costs at large banks. Wells Fargo deposit rate: 0.01% - Example of ultra-low deposit funding costs at large banks. Office building economics: $100/sq ft versus $600-$800/sq ft previously - Illustrates the collapse in office valuations. Blackstone AIR acquisition cap rate: 4.9% - Cited as evidence that some real estate can still trade at strong values despite higher rates. Commercial mortgage-backed / residential MBS yields: 12%-13% yields for BBB-rated paper - Fundrise was buying RMBS in 2022 when spreads widened. Later RMBS effective debt yield: 5.15% - Used to show credit spreads tightened significantly after the selloff. Regional bank funding spread: about 5%-6% deposit costs vs near-zero at large banks - Illustrates funding disadvantage and pressure on margins. Typical bank loan spread: 150-250 bps over benchmark - Describes current pricing for good bank loans. Multifamily mezzanine rates: 14%-16% - Fundrise’s lending box for mezzanine multifamily deals.

Pivotal Quotes: "The main insight is obvious because if the government wanted to pay down their debt, they could tax the private sector or print money." — Ben Miller: Explaining why public and private debt must be analyzed together. "The entire real estate industry is praying for a recession." — Ben Miller: On why rate cuts matter more than nominal growth for leveraged property owners. "Debt is money, right?" — Host: Clarifying Miller’s view that credit creation and liquidity are central to the debt analysis.

Implications: If rates stay high, refinancing stress will keep building in office, regional banks, and levered real estate. Households are safer, but the broader economy may face a delayed, uneven downturn unless rates fall or growth accelerates materially.