Buyers and sellers should be aware of a general economic slow down in all markets. Everyone will feel the effect of the leverage finance and subprime markets. Since I have been writing about the subprime markets for quite some time, I will focus briefly on the effects of the decline in the leverage finance market.
Leverage finance typically covers loans banks and other financial institutions lend to corporations or large private buyers. Companies like Blackstone use the leverage finance market to buyout companies and REITs. Over the past few years there has been a significant up-tick in Mergers & Acquisitions, leading to strong economic growth. As finance markets close (or shrink significantly) businesses will be less able to get large loans at favorable rates. As buyouts and mergers shrink, expect a dip in the equity markets. Looking at the Dow over the past week bears this out.
Very few people beyond the financial community pay attention to the leverage finance markets. These markets significantly impact the large commercial real estate market. When financing tightens at the top, the price effects trickle down. This could mean a significant negative impact on the commercial real estate market is coming.
All of this will create a drag on the economy, which will serve to slow down most, if not all, real estate markets. Unfortunately this could force even more defaults, putting many real estate markets in quite a tailspin. Buyers with excellent credit that can afford to wait six months to a year to buy will have their pick in most minor markets and increased negotiating leverage in major markets.
