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Billionaire investor Bill Ackman just issued a dire warning message on the future of the real estate market and economy. Ackman is the Founder and CEO of Pershing Square, one of the most well respected firms on Wall Street. That is why it got my attention hearing Ackman warn about how it is highly likely that there is a tsunami of real estate bankruptcies on the horizon that is just about to make landfall. These bankruptcies have the potential to account for hundreds of billions of dollars and send massive ripples through the economy. Let’s hear what Ackman had to say.
Unlike most residential mortgages, interest rates on commercial real estate loans do not remain the same for the entire length of the loan. Here in the United States, when an individual or family purchases a house, the vast majority of the time that purchase is financed with the standard 30 year, fixed rate mortgage. With a fixed rate mortgage, the interest rate on the loan is “fixed”, aka doesn’t change, for the entire time that loan is outstanding. This concept is incredibly important to understand and helps put Ackman's warning into context. Since the interest rate never changes, the home owner knows that their mortgage payment is going to remain exactly the same for as long as they own the house. Or, of course, until they pay off the loan in full. Homeowners with fixed rate mortgages don’t have to worry about their mortgage payment doubling or even tripling due to interest rates spiking.
This is a big reason why foreclosures on mortgages have been so rare. In 2021, only one-tenth of one percent of homes in the US were in foreclosure. Even during the worst period of the great recession, that number was still only 2%. Just a fraction of the default rate of other loans such as credit cards and auto loans. US homeowners are truly fortunate that fixed rate mortgages exist.
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