FAQ... What is the one thing you are most concerned about regarding the current Real Estate market?

What is the one thing you are most concerned about regarding the current real estate market?

Anonymous

Dear Anonymous,

The problems we face in Real Estate today, were spurred out of a global, low yield environment, due to the lowering of interest rates by the Fed and other central Banks around the world, after the tech "bubble" crash and 9/11.

This phenomenon stimulated massive investment in real estate, through the use of cheap capital. Unfortunately consumer debt also increased substantially, leaving Americans for the first time in history, with a negative savings rate. This is of grave concern, as it leaves Americans with little or no financial cushion, for the hard times upon us.

Investment Banks yearning for higher returns, responded to the historically low yield environment, by vastly increasing their holdings in the, high yielding sub prime market. (In essence creating the credit crises the Fed is wrestling with today). As more capital flowed into the Real Estate market, prices moved up triggering a wave of development and speculation, which has left us with a housing surplus.

Today, in many markets across the country, there is an abundance of high-end new construction sitting vacant, awaiting absorption into the market. This has pushed down prices, as the capital markets have dried up. Stricter loan requirements have been reintroduced, however at this point, with a national negative savings rate, it is not clear how many people will have the necessary down payment saved up.

Again in response, the Fed has lowered interest rates and Congress is exploring a variety of bail out packages, for distressed homeowners. It is hoped that the measures taken, will prevent the Real Estate bubble from deflating in a disorderly fashion. However I fear inflation, due to the weak US Dollar, (a byproduct of low interest rates), is a far grater problem than the Real Estate cycle.

The trade deficit amplifies the effects of inflation and the weak dollar, as everything we import, will become more expensive. However this could incentives consumers to stop buying and start saving... only time will tell. Additionally our exports have been steadily increasing over the last quarter, improving our trade imbalance and the deficit.

All this said I believe we will come out of this stronger and better for it, as we have always done in the past.

To conclude, the two things that concern me most, although not directly related to the Real Estate market, are the lack of personal savings and the presence of stealth inflation.

I believe that the Real Estate market is going through its natural cycle.  

Alexander Bermudez