How will the credit downgrade impact real estate? – Real Estate Matters
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How will the credit downgrade impact real estate?

Due to the US’s downgraded S&P credit rating, interest rates will rise, but the question is when and how much.  Opinions vary about the significance of this historic event, but all agree it will have some effect on real estate, both residential and commercial.

DSNews.com reports that on Monday, the S&P downgraded credit for Fannie Mae, Freddie Mac, and 10 of the 12 spimageFederal Home Loan Banks from AAA to AA+, sending shock waves through the market and resulting in decreased yields on US Treasuries.

Some experts expect interest rates to climb 500 basis points within the next six months.  Others disagree.  The National Association of Realtors expects that within the next 3-5 years, loan demand will be much higher and at that point the downgraded credit rating might contribute to higher interest rates.  Analysts say if Moody’s and Fitch downgrade US credit, the impact could be more drastic.  National Real Estate Investor reports the impact on potential multifamily borrowers:

“The emerging consensus among the U.S. commercial real estate community is that long-term interest rates will begin to rise in the near future. This is especially true for multifamily borrowers who have relied on Fannie Mae and Freddie Mac to finance their projects.”

Forbes believes that any impact on the commercial real estate market is more likely to be caused by weakened demand and consumer confidence:

“The larger impact for commercial real estate could be on the demand side, at least in the near term.  Companies and consumers are already hesitant to spend.  Downgraded U.S. debt will likely only increase that hesitancy given the increased uncertainty it creates. There could be a negative impact on consumer and business confidence and thus spending, which could translate into reduced economic activity and as a result reduced commercial real estate demand, at least in the interim.”

Or, could the threat of rising interest rates motivate buyers to close more deals now?

The National Association of Realtors Chief Economist Lawrence Yun says at this point we should be more concerned about difficult underwriting standards than interest rates.  This is true for both residential and commercial loans, as buyers utilizing government backed mortgages are now required to put 20% down, and the equity required for commercial mortgages can be up to 35%.

Visit Real Estate Matters regularly for updates on Fannie, Freddie, and the commercial mortgage market or follow us on Twitter @USTRealEstate.  For information on the residential real estate market in the Twin Cities, be sure to read about St. Thomas’ new market index.

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