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(Read more on the debt and equity markets.)

NEW YORK CITY-A recent report from locally based Rreef Real Estate predicts that the dust will settle in today’s current financial crisis. Markets will establish pricing, and riskier debt will become marketable again, however, the tight spreads between low and high risk investments will not narrow to their pre-July levels the report says.

Even low risk debt is likely to be more expensive than in the past, while higher risk debt will remain significantly more expensive, the report notes. These events, which are still unfolding, should impact the overall economy, the real estate markets and real estate pricing.

The trouble in the subprime sector extends to the overall investment market. The report says that in a global economy flush with cash seeking higher yields, leverage has been used across all investment vehicles. In the commercial property markets, mortgages were underwritten for core and even development deals at very high loan-to-value ratios on properties that in some instances were “ill equipped to cover their loan payments.”

According to the report, the US economy was already on a softer trajectory leading up to the recent financial turmoil. The current credit and liquidity squeezes, however, have increased the downside risk to US economic performance going forward. Nevertheless, the underlying fundamentals of the economy are strong, with the notable exceptions of the housing and mortgage markets and the riskier segments of the debt markets.

Housing remains the primary drag on the economy, subtracting roughly 100 basis points from growth over the past four quarters, the report notes. Also, consumer spending has actually fared better than expected despite the slowdown in housing and elevated oil prices. Business spending, especially spending on equipment, has struggled lately despite the need to boost economic growth through productivity improvements.

The report explains that exports are proving a critical support to the US economy due to strong growth fundamentals around the world. Outside of the US, growth fundamentals remain on firmer footing. A falling US dollar is further assisting export activity.

The report explains that although it is still unclear how the current financial market turmoil will affect economies, the company’s economic outlook remains cautiously optimistic. Strong fundamentals should limit the downside from the recent financial crisis. The financial turmoil should, however, lower US growth trajectory for the balance of 2007 and 2008. “With the housing and debt market corrections behind us, strong economic growth is forecast for 2009 and 2010,” the report says.

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