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Monday, August 8, 2011 - Real Estate Short Time?

Real Estate Short Time?

"So what about housing? Commentators are now busily rehashing S&P's blunders in the years leading up to the collapse in property values, a shrill reminder that there once were firms called Washington Mutual (JPM), Wachovia(WFC), Bear Stearns, and Merrill Lynch (BAC). Residential real estate, like the rating agency's credibility, remains fragile.

Chief among housing market concerns is the degree to which the downgrade will damage consumers' already dour outlook for the economy. Today's housing market continues to be highly-sentiment driven, with conditions fluctuating week-to-week, even within individual markets. On the morning after the debt-ceiling agreement last Monday, the phones at my real estate firm were busier than they had been in weeks, with everyone from hedge fund managers to contractors expressing relief that with a deal struck, we could all get back to work.

Focus has now shifted to figuring out what this downgrade actually means. A dreary task for an already pessimistic group. Last month, the University of Michigan's widely watched consumer sentiment index slipped to its lowest level in two years. And employment, which is inextricably linked to housing, is really just a reflection of confidence. Given the vast uncertainty already stemming from Friday's historic downgrade, American consumers are not likely to be overly eager to embark on large-scale purchases. Like homes.

Second, persistently low interest rates have gone a long way to buoy home prices, enabling would-be buyers to either buy more house or at the very least keep housing costs under control. If US debt holders begin demanding higher interest rates for owning Treasuries, home financing costs would rise. And while this would bode poorly for home prices, the Federal Reserve, working closely with the Treasury Department, has given every indication that it will bankrupt the country before allowing market forces to push up interest rates in any material way."

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