In my life time commercial real-estate markets have always been a lagging economic indicator not a leading indicator. When my younger brother who owns a Florida excavation company told me business was still booming in 2007 despite the tumbling housing market, I predicted he'd see a big fall off by 2008.
Now that it has come true, just how bad is it? The "experts" I listen to, including FDIC chairwomen Sheila Bair expect more defaults and bank losses on commercial loans. The FDIC agency reported that the banking industry lost $3.7 billion in the second quarter amid a surge in bad loans made to home builders, commercial real estate developers and small and midsize businesses.
The New York Times (Sept. 4th) published an article which stated,
Even as the economy may be recovering, banks across the country are confronting a worsening outlook for their construction loans, an area that boomed for much of the decade.
There are no "green shoots" for commercial construction and real-estate.
Reports filed by banks with the Federal Deposit Insurance Corporation indicate that at the end of June about one-sixth of all construction loans were in trouble. With more than half a trillion dollars in such loans outstanding, that represents a source of major losses for banks.
Construction loans were a primary source of revenue for many banks, particularly smaller ones without a national presence. Other types of loans were not easy to make. A handful of big banks came to dominate credit card loans, for example, and corporate loans were often turned into securities.
So, while plenty of leading economic indicators show positive signs and that the American single family housing market has improved...commercial real estate construction seems likely to get worse.
Banks have been taking losses and cutting back their commitments for a couple of years on home construction. At the end of June, $173 billion in construction loans related to single-family homes was outstanding, barely more than half the peak level reached in the fall of 2006, when the housing market was booming. At the end of June, $291 billion in commercial real-estate loans was still outstanding, (down only a few billion from the peak reached earlier this year).
“On the commercial side,” said Matthew Anderson, a partner in Foresight Analytics, a research firm based in Oakland, Calif., “I think we are fairly early in the down cycle.” Foresight estimates that 10.4 percent of commercial construction loans are troubled, but expects that to increase as the year goes on.
Now do not assume the American stock market must fall too, just because lagging indicators like commercial real-estate markets and unemployment are horrible. Yes, it can easly fall a 1,000 points, even if the worst is over. In fact, most bulls expect a 5-10% correction between September and October. But plenty of people perdicted in June when the DJIA was only at 8,200 it would fall back to 7,200 too. Those who listen to that advice lost another 10-15%.
The lesson to remember, is the stock market is a leading economic indicator. You'll recall it started falling in the fall of 2007 when few news reports foresaw any issues in commercial real-estate. In fact the usual Donald Trump disciples were touting real-estate investments while only a few outcast Economist like Nouriel Roubini were predicting doom. Even Ben Bernacke said he saw no real-estate bubble in 2007. If you are only investing when the news is great -you missed the boat along with 75% of the gains. Just one more reason I advise people to have a long term plan before they start worrying about what stocks to buy.
Last year, we learned the regulators, like the bankers, and Wall Street investment bankers did not comprehend the risks of the exotic instruments dreamed up by financial engineers. This year we are learning that the regulators, like the bankers, also failed to understand the risks of the generous loans that the banks were making. At the very time bankers should have been reducing commercial loans they were expanding, thus pushing the real-estate bubble into the stratosphere.
We're all hearing about empty malls due to over building which resulted in a glut of malls. Maybe we're just all shopped-out? Perhaps someone will do a research paper correlating our mountain of personal debt to our glut of malls.
Here just one example of a funeral being held in my area for what was to be the city's downtown area rebirth.
Columbus City Center was developed by the city as part of the Capitol South development, opening on August 18, 1989. It was pitched to investors and taxpayers as a "must have" to revitalize Columbus downtown. Now a building wholes economic life should be 50+ years is being torn down in less than 20 years (to make room for next big idea).
Ok, after writing this article and listening to these experts -I'm depressed.
If you're depressed over the economy and short on Prozac then go get a shot of inspiration at The Wright Inspiration Station TM or if you need an accounting or finance refresher course go to The Wright Education Station TM
No comments:
Post a Comment