Fed Trips over Eye-Popping Commercial Real Estate Bubble, Accidentally Looks, Sees “Early Signs” of “Search for Yield”…”Intoxicating boom and terrifying bust.”

Tuesday, November 10, 2015
By Paul Martin

by Wolf Richter
November 10, 2015

No one in his right mind plays in commercial real estate with their own money. Other people’s money is the key. Low interest rates make it happen. Banks are eager to lend. They repackage some of these loans into highly-rated Commercial Mortgage Backed Securities that yield-desperate investors are eager to gobble up, spreading the risk far and wide.

CMBS made the prior commercial real estate bubble possible, before it all blew up in 2008. And they’re making it possible now. When it doesn’t work out, as in 2008, it isn’t that much of a problem because other people’s capital gets destroyed.

And so prices have been bid up again over the years since the low of May 2009, and miracles have been performed after the crash, and construction cranes are dotting cities, and one of those forests of construction cranes must have triggered something funny in Boston Fed President Eric Rosengren. He opened his eyes and counted these cranes on a short walk in Boston, and for the first time saw what had been ballooning before him for years: a commercial real estate bubble.

Or at least now he admitted it, or a tiny part of it, rolled into a speech on Monday that confirmed, to the apparent shock of the stock market, which swooned, that December “could be the appropriate time for raising rates.”

The Rest…HERE

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