In the past articles we have used the term price, or the price of Real Estate which is much different than the value of the asset. The value of the asset is what all the fuss is about in the Mortgage Backed Securities market. Real Estate sold for prices that far exceeded value. Prices actually far exceeded any financial viability of properties.
Liquidity has always been a problem for Real Estate as an investment. To sell quickly the price would need to be below market, or well below market value. Many people in the Real Estate industry interject a supply, and demand theory into the discussion of market value. Recent, or historical sales data is used to try to hit that market value. All sales data has to do with is what people are willing to pay. It has to do with pricing which is much different than value.
Rents, or what a property will rent for, gets us much closer to the financial viability of a property. The past implied value of a property is that if you put 20% down with an interest rate of 10% the rent should cover the mortgage payment. That is still the formula Real Estate is having today with some very big exception.
Number one is that interest rates are lower today which adds to the illusion that prices are stable. Rents are hitting at about 20% down, and an interest rate of 5%. That lowers the payment on a $400K property by more than a thousand dollars per month. The problem is that interest rates for commercial properties are a little higher than 5%, and rates will go up some time in the future. That is where the real downward, or upward pressure of interest rates are. It has to do with the value of a property.
There are other considerations, of course, to the value of Real Estate. This was just a little mental exercise to show where things got a little out of whack.
