Expect further slowing in the real estate markets - residential and commercial

Commercial and residential real state markets are buoyed by the ability of bankers to securitize and sell loans. This provides more funds to make still more loans. Bankers ability to securitize is being changed and buyers of the securities demand higher lending standards and greater return.

Over the last several weeks, the market for sub prime residential mortgages as all but disappeared, the market for prime residential mortgages has been characterized with much tighter lending standards, and the market for leverage financing commonly used in buyouts and by real estate investment trusts (REITS) has seen a huge decline in volume as buyers want more loan covenants and higher interest rates.

This is likely to lead to slow down in the commercial real estate market, as interest rates rise and lending standards tighten. This will also likely lead to further declines in residential real estate prices as more potential home buyers are unable to get financed and as more potential home buyers decided that the asset they are considering is not worth it to them.

Still there is little signs of reduced consumer spending. As long as corporate profits are maintained employment is likely to stay high and consumer spending likely to stay healthy.  Thus, these changes are not likely to spread to the general economy and the changes in business conditions will remain limited.  Nonetheless, a slowdown in the volume of deals and the rate of expansion is expected.

Risks has increased in the markets everywhere and the credit markets have reacted to that. This is not surprising or unexpected this late in the business cycle. The stock market is also reacting to the changes in the credit markets and to the increasing perception of risk. While the world is not ending, life may go back to how it was before massive amounts of credit were available, cicera 1999.