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Fed official calls for further action to cool property markets

On Behalf of | Mar 27, 2017 | Residential Real Estate |

Rising real estate prices in California and around the country have industry experts and officials at the U.S. Federal Reserve worried. A sudden downturn in property prices that began in 2007 shook financial markets and sparked a worldwide crisis a year later, and fears that the same thing could happen again have led to calls for steps to be taken. The Federal Reserve took action in December by raising interest rates by 25 basis points, but a senior Federal Reserve figure believes that other tools should be employed to cool the property sector down.

The president of the Federal Reserve Bank of Boston says that he is particularly concerned about the rise in apartment prices in many American cities, and he suggests that overheating commercial real estate markets could make the next economic downturn far more severe. The options available to regulators include placing restrictions on the nation’s banks, but it is uncertain how such proposals would fare in a political environment where gaining support for new regulations is often difficult.

The surge in property prices has been fueled by a growing economy and historically low interest rates. While further interest rate increases are expected, a growing number of analysts believe that interest rate manipulations alone will not be enough to prevent another financial crisis. The volume of apartment mortgages held by America’s banks increased by 12 percent in 2016, and bankers are worried about plunging capitalization rates in the sector as price increases have begun to outpace operating incomes.

Stricter underwriting standards can make finding appropriate financing packages more difficult for property buyers and developers. Attorneys with experience in this area may help their clients to avoid pitfalls by scrutinizing loan documents carefully and drawing attention to potentially contentious provisions.