Real Estate Double Whammy
To add to today’s gloom is the Case-Schiller report on home prices, which fell in 0.2% December. While that decline is much smaller than those of the months back in the depth of the crisis, it represents a give-back of the strengthening we had seen at the end of last summer. It confirms the thought we had back then that the only source of support for home prices was the stimulus package in the form of the first time buyer tax credit. That credit gave a temporary boost to the market, and brought just enough buyers in to bolster demand and thus firm up prices. With the effects of the credit fading, and with wages stuck in the deep freeze, there is no ongoing reason for prices to firm more. More likely, they will slip a little until the usual seasonal blip over the summer stems the rot.
Within the numbers a separation appears to be growing: at the low end of the price range the situation seems to be stabilizing. The wipe-out caused by the sub-prime mess and the surge in job losses has peaked for now, and so low end homes are not losing value as fast as before. Indeed, in some cities, prices have edged up as the low end market settles at a new and lower level. In contrast, at the high end prices appear still to be weak. It looks a if there will be more price erosion in the expensive home market, and that it will take the rest of 2010 for that higher end to reach stability.
Meanwhile in commercial real estate the losses continue to mount. The glut in commercial real estate is having a particularly strong impact on smaller and middle sized banks who typically have a goodly number of loans in their local commercial real estate markets. The collapse of these projects often takes a long time to be reflected in a bank’s books – there is a natural tendency to try to stave off the losses as long as possible, and it is notoriously difficult to get good valuations in marginal building projects. So it has taken a few quarters for the storm to gather momentum, and this year will see its full force.
This means we are now seeing the expected wave of loan charge-offs, with the result that there are more than 700 banks nationally in sufficient financial difficulty to earn them a place on the FDIC’s ‘watch list’. This represents about one in ten of all our banks, and is the highest number in sixteen years. This stark fact provides us with a massive reminder that the banking sector is far from stable at the moment. It is little wonder that small businesses everywhere are having trouble finding credit: the banking system is still too fragile for it to be a strong source of finance.
To put this in context: assets defined as being ‘troubled’ – i.e. with a good chance of turning into losses – rose to $402.8 billion nation wide at the end of 2009. This compares with $345.9 at the end of the third quarter.
On the bright side: according to the FDIC, 95% of all banks have adequate or more than adequate capital, which means that many of that 700 on the watch list will have enough capital to survive. So it is not all gloom.
It just seems that way.
