Credit Market Uncertainty

The turmoil in European credit markets is going to last at least into next year, and likely into 2012. It could get worse or things could begin to stabilize if Merkel and the IMF start to act decisively and make it clear there is a real plan and that the Euro will not be allowed to collapse, and possibly disappear. There is a huge gap in the need for new capital by European governments as well as by European corporations. Unemployment which is already very high, has to go much higher. The higher it goes the more the need by governments to raise even more money since they pay very high and complete unemployment and benefits to their people even when unemployed. Taxes will go down as the economies stall. Further compounding things will be major cuts in government spending. It is very unclear all of this can work without a true devaluation or a breakup of the EU. On the positive side the major decline of the Euro does make European products far better priced so exports should increase and tourism from the US should also increase. However flight capital will go to the US or gold. Fear that the Euro could possibly become extinct is motivating capital to flee or convert to dollars or other deposits.

What does all this mean to the US real estate investor. Good and maybe not so good. The good is that much more capital will come to the US now to be parked here. That means the usual major cities-New York, Boston, Washington, etc will very likely see increased interest in buying major assets here. Nobody expects the situation to improve for several years so it is likely flight capital will park ere for at least 3-5 years. It is unlikely that this capital will be investing in secondary cities since that is not the pattern of such money. There is already far too few assets for the capital that is available and this is likely to be exacerbated as more capital flows in. Treasury yields are likely to stay very low as the Fed tries to make sure the European problems do not negatively impact the US economy more than is unavoidable. So in time the capital will start to look for cash flowing assets like good real estate. With values down so far these investors will correctly feel they are getting a good deal if they buy property in the US in the near term. In short, I believe real estate prices in major cities will increase more than they might have were it not for the Euro crisis.