The Standard & Poor's Ratings Agency made an unprecedented downgrade of the United States credit rating from AAA to AA+ Friday evening. This followed what had been an already shaky week for global markets after a drawn out fight over the debt ceiling in Washington and concerns over further European debt defaults. Immediately my mind begins to play out the impact on the local Jupiter real estate market? What affect will this US Credit downgrade eventually have on West Palm Beach home values or Palm Beach Gardens home values?
I expected the beginning of the week would result in a negative reaction from the stock market. Real property not being a liquid asset results in real estate markets reacting much slower to economic news or trends. We may not see the impact of this news on real estate sales volume or property values for 3 - 6 months. The initial reports will influence consumer confidence on a national level, but I don't expect it will have an immediate major influence on Palm Beach County real estate sales.
What I would watch for in the coming weeks is how the other two major ratings agencies, Moody's and Fitch, respond. Moody's today reaffirmed its AAA rating on US debt while Fitch reports they are still performing a review. If Moody's or Fitch were to also downgrade the US Credit rating then I would imagine markets and consumer confidence would mirror the downgrade. Now just because S&P made this historic announcement does not mean the US is about to default on its debt. A AA+ rating is still exceptional. We also have to take a hard look at who is making this determination to downgrade the US debt - the credit rating agencies - who themselves are not infallible as we feel all too well in our current economy. These are the same agencies that were handing out AAA ratings on basically worthless loans, thus allowing Wall Street to peddle junk loan securities as AAA rated debt and providing the fuel (free money with little to no qualification) to America's recent housing boom and bust. Lehman Brothers also had a stellar AAA credit rating at the moment of its monumental collapse, so just because you have a AAA credit rating does not mean your immune to failure.
The more concerning news for national real estate trends and even the local Jupiter Real Estate and Palm Beach Gardens Real Estate markets is the announcement from Standard & Poor's that they would also be cutting the mortgage companies Fannie Mae and Freddie Mac's credit rating. Fannie and Freddie are the largest purchasers or residential mortgage loans in the United States. These loans are purchased in a "secondary market", thus allowing your bank to issue you a loan to purchase a home and then your bank can turn around and sell your loan on the secondary market recouping the principal they just loaned you, so they can turn back around and lend it to someone else. A downgrade in Fannie and Freddie's credit rating results in the two mortgage companies cost to borrow going up. Imagine you walk into a car dealership today to purchase a car. You walk right up to that purple El Camino you've been eyeing for weeks and Beau, the sales guy, says lets run your credit and see what kind of deal we can get you on this beautiful example of American innovation. Beau comes back and says your credit rating is excellent and he can get you a 5% interest rate for your car loan. You tell Beau you need to go home and speak with your wife as she really wanted a pink Cadillac. You arrive back at the car dealership the next day and tell Beau to write up the papers. The sales manager runs your credit through one more time just to make sure and finds your credit score dropped 25 points overnight. He explains that while your credit is still good, you no longer qualify for the best rate and your interest rate will now be 5.5%. Oh well you say, a half of a percentage point will not add that much to your monthly payment, 5.5% is still a great interest rate, and it has always been a dream of your's to own a purple El Camino. You drive off the lot in your new car.
This is what happened to the US Goverment Debt and Fannie Mae and Freddie Mac on Friday. We know our government is going to keep on spending money and Fannie and Freddie are going to keep purchasing mortgages, but their cost to do so just went up and eventually that will trickle down to the consumer level. I expect in the short term we might actually see a short term uptick in real estate activity as homebuyers race to lock in low interest rates and home sellers make extra concessions to make sure their transaction goes through in case interest rates rise. An increase in mortgage rates would put additional downward pressure on home values.
The important thing to remember with real estate is it is REAL. Real property, houses, land etc., are physical assets and housing has a particular appeal because at the end of the day people need a place to live. In the past 10 years we experienced a major boom and bust with real estate values fueled by some creative financing and other extraordinary economic conditions. We certainly should not expect much price volatility in the real estate markets moving forward over the next decade. I do believe Palm Beach County home values can only remain this low for another 2 - 5 years. Even with a slow economic recovery and 10% unemployment, Florida's population is expected to add 2 million new residents over the next decade. I do not know if there will ever be a better time than right now to buy a home in Jupiter, Florida.
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