Financial stability experts at the US Federal Reserve are increasingly concerned about commercial real estatewhich could face risks from rising interest rates and changes in end-user demand.
Over the past year, the Fed has raised borrowing costs rapidly, from near zero at the start of 2022 to just over 5% today, to cool inflation by slowing down the economy. Until now, the consequences of that abrupt change have been most evident in the banking sector.
But the Fed staff and the market experts they consulted mentioned the commercial real estate sector as another area that deserves attention in the central bank’s semi-annual Financial Stability Report, which was released on Monday. The jump in interest rates in the last year “increases risk” of commercial borrowers being unable to refinance their loans when the loans reach the end of their terms, Fed staff wrote in the report, noting that commercial real estate values remain “elevated.”
LThe Fed’s comments on the commercial real estate sector amounted to moderate vigilance rather than a strong warning, but they come at a time when many investors and economists are closely monitoring the sector. The prospect of office buildings in downtown areas, where workers have not fully returned after a shift to remote work that began during the coronavirus pandemic, has emerged as a particular concern on Wall Street.
The report included a survey of 25 professionals from stockbrokers, investment funds, research and advisory organizations, and universities, and those respondents ranked andl commercial real estate as its fourth biggest concern for financial stability, behind the risks from rising interest rates, banking sector stress and US-China tensions, but ahead of Russia’s war in Ukraine and a looming fight in Congress over raising the credit limit. Debt.
The stability report also focused on risks to the economy that could stem from the recent turmoil in the banking sector.which many officials fear could cause banks to back down when it comes to lending.
Like the banking sector, the real estate sector (residential and commercial) is highly dependent on financing rates. That means now, with the Federal Reserve’s rising cost of credit, loans are more expensive and harder to repay. And that affects the owners of office buildings, shopping centers and hotels, who have to refinance their debts or sell their properties at lower prices. In many ways, it’s not a surprise.
Have you ever wondered how housing became one of the main ways of investing and saving for ordinary people? Why not rent and now? Why not put our savings in other types of investments such as a business or Bitcoin? The “owners association” implies owning your house. But is owning your home a good deal?
Let’s go to the story. Ownership of land and houses has evolved over the centuries, from the landed aristocracy to the propertied middle class. In fact, land ownership was tied to political power and the right to vote in Britain until the 19th century. The aristocrats owned huge tracts of land that generated income from agriculture and mining. However, beginning in the 1830s, their situation changed due to falling grain prices, foreign competition, and increased taxes. Many nobles fell into debt and had to sell their properties or mortgage them to banks.
The modern mortgage market in the United States began in the 1930s, when the government created agencies to guarantee and purchase loans from homebuyers.. These measures allowed millions of Americans to access the dream of their own homewhile creating a secondary market for mortgages that were traded like securities.
However, the real estate market is not as safe an investment as it seems. Throughout history, there have been various bubbles and crises caused by excessive credit, speculation and over-indebtedness.. The most recent example is the subprime mortgage crisis, which broke out in 2007 and triggered a global recession. Subprime mortgages became complex and opaque financial instruments, sold to unsuspecting investors, which collapsed as home prices fell and delinquencies rose.
However, The real estate sector has been a key factor in the growth of the modern economy, but also in its decline. Ownership of land and houses has been a source of wealth, but also of risk. And the mortgage market has been a tool for democratization, but also for destabilization.
Do you remember when we had to buy DVDs and CDs to watch movies and listen to music at home? If we liked a band, we would go to the store to buy their CD. If we wanted to see a movie, we rented it or bought it. We had shelves full of records and movies that took up space and dust. But those times are long gone. Now we subscribe to platforms like Netflix and Spotify. For what we used to pay to get a CD with 10 songs, now we have access to millions of songs for a monthly fee. For what we used to pay to see a movie, now we have thousands of options to choose from for the same price. Subscription culture has changed the way we consume entertainment.
What if this subscription culture also reached the home? What if instead of buying a house, we rented it for a certain time? What if instead of investing our savings in an asset that could lose value or cause problems, we invested it in safer and more profitable assets? What if we pay the rent of the house with the profits generated by those assets? Suddenly, that option doesn’t sound so far-fetched. Suddenly, the dream of owning our home is not an obligatory dream for everyone. Suddenly, it’s optional.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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