With interest rates rising dramatically, are we staring at the abyss of another correction in the real estate market? It is obviously difficult to make projections when faced with real estate values in various jurisdictions and asset classes at near record highs. But there is no doubt that the real estate market boom is ending.
Recently, Fed Chairman Jerome Powell noted that “we’re well aware that mortgage rates have moved up a lot, and [we’re] seeing a changing housing market.” Indeed, mortgage rates started the year in the low 3% range and surged to nearly 6% in June. It is also equally clear that the Federal Reserve has just begun the process of raising the Federal Funds Rate which will increase borrowing costs further.
How will increased borrowing costs going forward impact the real estate market? Those with variable rate mortgages and short-term financing will experience extreme cost pressure in the very short term. Absent the infusion of additional capital, many real estate owners will be forced to liquidate their real estate holdings or may be required to seek debt relief from their lenders. It is equally clear that acquirers of real estate will be saddled with increased financing costs that will be significantly higher than a few months ago. In addition, lenders will likely be lending less money while mandating higher interest rates.
The real state crisis which may be brewing is different from the previous crash of 2008 which had its origins in the unprecedented growth of the subprime mortgage market and the eventual collapse of the securitization of commercial and residential loans. In that crisis, the lending community was directly exposed, with many financial institutions failing because of rising borrower defaults. Unlike then, lenders today are much better capitalized, and predictions suggests that the lending community will be able to weather any pending real estate correction.
A real estate correction will no doubt lead to a rise in real estate litigation and new damages theories relating to rising financial costs. While it is true that no-one can predict the future, mediation will play a vital role in resolving any pending real estate correction resulting from increased financing costs. Efficiencies we learned from the pandemic including on-line mediation will aid in economically resolving real estate cases. Unlike the previous 2008-crisis, and because of the wide-spread use of on-line mediation, asset managers with real estate properties throughout the country will no longer be required to travel to attend mediation. In 2008, I became a distressed real estate attorney to address the crisis. I look forward to using the lessons I learned as a mediator to address any new real estate crisis which may be on the horizon.