Faltering Construction Loans = More Bad News for Banks
“On the commercial side, I think we are fairly early in the down cycle.”
-Matthew Anderson, a partner in Foresight Analytics
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Floyd Norris explains the potential dollars involved in further CRE distress:
“EVEN as the economy may be starting to recover, banks across the country are confronting a worsening outlook for their construction loans, an area that boomed for much of the decade.
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.”
I would challenge the notion that we are truly in a real recovery. We are still int he “less bad” phase, with most gains due to government intervention, not an organic recovery.
Norris continues:
“At the end of June, $291 billion in [commercial] loans were outstanding, down only a few billion from the peak reached earlier this year. . . . Foresight Analytics estimates that 10.4 percent of commercial construction loans are troubled, but expects that to increase as the year goes on.
The definition of troubled loans used in the accompanying charts includes loans that are at least 30 days past due, as well as those on which the bank identified problems that led it to stop assuming that interest on the loans would be paid.”
Those folks who believe the “all clear” whistle has sounded may find themselves in unpleasant circumstances in a few short quarters . . .
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click for larger chart
via the NYT
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Source:
Construction Loans Falter, a Bad Omen for Banks
FLOYD NORRIS
NYT, September 4, 2009
http://www.nytimes.com/2009/09/05/business/economy/05charts.html
See also:
For Commercial Real Estate, Hard Times Have Just Begun
TERRY PRISTIN
NYT, September 1, 2009
http://www.nytimes.com/2009/09/02/business/economy/02office.html
September 6th, 2009 at 2:01 pm
CRE = the other shoe.
September 6th, 2009 at 2:02 pm
sounds to me like another reason for stocks to rally
September 6th, 2009 at 2:02 pm
Better yet:
CRE = the other, other shoe (we’re still not finished w/RRE).
September 6th, 2009 at 2:34 pm
I don’t get all this “not organic” stuff, Barry. I take it you mean that government spending isn’t sustainable. Well, this nation has over $2.2 trillion in repairs to do on its infrastructure alone. Government spending is sustainable because we have no choice but to sustain it, or suffer a wave of catastrophic bridge failures, steam-pipe explosions, airliner crashes due to inadequate air traffic control systems, gridlock on our nation’s highways, and an inefficient electrical grid that cripples our ability to compete in the global marketplace.
http://www.infrastructurereportcard.org/
September 6th, 2009 at 2:35 pm
Marcus
Indeed, RRE seems to be a many-footed creature (from the black lagoon),
September 6th, 2009 at 3:53 pm
>> in a few short quarters . . .
Until then, everyone back into the pool!?
September 6th, 2009 at 4:25 pm
f411-
i agree w/ the maintenance, repair and improving of infrastructure-
but isn’t that something that we should be doing anyway?
akin to saying that we are going to pay for health care by reducing waste in medicare-
but really- shouldn’t we be reducing costs and waste anyway?
my guess much of that infrastructure spending would be “make work” projects- i.e- repaving roads that don’t need repaving-
but- i’m with you as long as the spending went to truly vital projects- and maybe some other initiatives that reduce our dependence on foreign oil- such as conversion to nat gas all federal automobile fleets or some other bold move
September 6th, 2009 at 5:08 pm
Franklin411,
If I may. I suppose Barry means with “organic recovery” economic growth from self-sustaining capital accumulation; an economic growth that isn’t mostly held alive by deficit spending by the government and won’t fade as soon as the deficit spending ends.
Sure, you are right, infrastructure needs to be rebuilt. There are two possible sources (actually there are three) from which government can finance it. One is financing it from additional tax-revenue coming from increased income in an economy that shows self-sustaining growth, the other one is two finance it from adding additional debt to the existing government debt, i.e., future income, not yet generated, is promised to the creditors. (The third one would be building it with state owned companies). I’ve got more and more the impression that you think it doesn’t matter how it is financed, since debt could be increased infinitely, allegedly. Well, it’s still room left until US-government debt levels will have reached Japan’s government debt of almost 200% of GDP, right? Not that I, as a rootless cosmopolitan, care whether US and the US-dollar stay competitive in the world. I don’t have any preferences with respect to that.
rc
September 6th, 2009 at 5:46 pm
Franklin:
What did your nanny think about having to work when you were a small child? I have come to the conclusion that you must have come from real wealth in your disdain of the working class and your lack of understanding of how important wages are to the average American, and how much it hurts to have to give a large portion to the government.
I grew up as the poorest child in my class in a rural school in the south. What little we had, there was always a share to give to Uncle. Government of course, is necessary for civilization. But what I have problems with, coming from a poor background, is that my family was always on a budget. We spent every nickel we had. Our national government is not run so that the average working American gets to hold onto what he earns, no matter what his station in life. And this is true of both parties, not just the latest idiots in the White House or Congress.
More debt? Apparently not a problem. We’ll spend it now, and worry about it later. Maintain infrastructure? I think we’ll be lucky to maintain any sort of a job base….
And Franklin, your government programs….my considered opinion is that in the long run they may do more to keep the poor IN poverty than to alleviate it. As with many poor white families in the south, my family wouldn’t consider food stamps or welfare payments…we’d have simply been crushed if others knew how poor we were.
September 6th, 2009 at 6:23 pm
@Ahab,
Well, I haven’t looked at the numbers and frankly the $2.2 tn estimate comes from the Society of Civil Engineers, which potentially has an interest in inflating the number a bit.
@Rootless
No, actually, I think there won’t be *any* sort of sustainable economic recovery if we *don’t* spend now to fix our long term economic problems. At its core, the problem is due to the fact that we haven’t invested at all in the engines of growth over the last 30 years: education, infrastructure, encouraging innovation. Instead, American capital has been directed to various patch-jobs that were designed to keep the public from realizing that we are on an unsustainable course. Simply put, America consumes everything and produces nothing of value to the world. There are always those who profit from such a system; Wal-Mart and the oil companies come to mind. Ever so often, they throw us a bone in the form of a tax cut to keep us happy, which only digs us deeper into the hole.
Now we are at an inflection point. China and India are developing middle classes, and in 20 years they won’t need us to consume their output anymore. When that time comes, they won’t need to finance our debt any more either. If we haven’t rebuilt our production-economy by then…look out below.
The way I see it, we’re on a ship that has been slowly sinking since January 20, 1981. Various administrations of both parties followed the same, debunked libertarian ideology that led them to drill holes of all sorts into the hull. We need to borrow heavily now to patch what Reagan, Bush, Clinton and Bush destroyed. Debt is only a symptom of the fact that the American economy has become a giant leech instead of the productive force it once was in the world.
@Bruce
A nation is not a family. My father grew up picking grapes in the fields. He ultimately went to state college, back in the 60s when it was free to all Californians. My first job was scrubbing toilets. I cringed as much as anyone else when I saw that my small paycheck was eroded a bit smaller by taxes. But I have never forgotten the fact that, without taxes, both I and my father would probably have had no options except being fruit-pickers.
The same is true for millions of Americans whose families were saved from permanent serfdom by the New Deal and Great Society. It’s a shame that so many have forgotten the fact that their lofty achievements are directly attributable to the fact that they have stood on the shoulders of millions.
September 6th, 2009 at 7:02 pm
Another columnist who does not have a clue how the real world works. CRE is the next big profit center for the banks. The government will cover the losses, of which the banks will write down a very big portion of them, and then buy them back for pennies, and put them on there balance sheets for quarters and then be able too borrow five dollars against them for them too go invest in other things while the properties sit and detiorate until they are written off as worthless after they have gotten a big tax break. CRE will most likely safe the economy, they have yet to be given the luxury of once twice three times leverage that creates real wealth and more jobs………someone will have too demo them in five years.
September 6th, 2009 at 7:09 pm
Franklin411,
“No, actually, I think there won’t be *any* sort of sustainable economic recovery if we *don’t* spend now to fix our long term economic problems…
…We need to borrow heavily now to patch what Reagan, Bush, Clinton and Bush destroyed. Debt is only a symptom of the fact that the American economy has become a giant leech instead of the productive force it once was in the world.”
I think you and your administration are delusional, if you believe the US-economy can grow itself out of the mountain of debt and avoid major defaulting of debtors, massive losses on the side of creditors, debt deflation, and severe economic crisis in the process. Do you really believe the US-economy will ever show annual growth rates of 15 to 20% or more (have you tried a little bit math?), that would be needed to have enough income to divert to pay of government debt of 100% of GDP or more that will be reached in the not so far future, and 300% of private debt to GDP where the private debt levels are now? However, I suspect you are desperate. Neither you, nor the Obama-administraion know what else to do. You don’t know any solution to it. Therefore, you put all the empty slogans about “investing in the future” out here. And you feel threatened by the rest of the world.
rc
September 6th, 2009 at 8:08 pm
Marcus Aurelius Says:
CRE = the other shoe.
That wouldn’t be so bad except we’re in Imelda Marcos’s closet.
September 6th, 2009 at 8:16 pm
@Bruce,
The sense of shame at being poor presented in your story reminds me a lot of “Mississippi Burning” and the reason given for poisoning the mule. But If your family had swallowed its pride and utilized the government benefit of food stamps, you would have had more disposable income, and the mule would still be alive.
September 6th, 2009 at 9:12 pm
And So The Next Crisis Begins: FHA Loans Starting to Default in Increasing Numbers – 2% Reserve Threshold Threatened
quote: “Watching America act is like watching a driver on coke, swerving left and right, over the expressway at 120 miles per hour. We’ve said many a time that all we’ve done to create this “housing bottom” is institutionalize in the government the EXACT same behaviors that was done by the banks.”
quote: “I only wish I could get a tax cease and desist for the future FHA bailout by professing I saw it coming. We should not be forced to pay if we said it would happen.”
quote: “I am going to start keeping a track of this issue because what FHA is today is nothing compared to the crisis we’ll see hit with hurricane force in about 30 months. This is not even the tip OF the tip of the coming iceberg – only the beginning… but now we see (as I predicted) why the Ginnie Mae CEO ran off into the night a few weeks ago – not a year into the job.”
September 6th, 2009 at 9:29 pm
Study: 2 out of 5 working-age Californians jobless
Gulp!
quote: “The report said that California now has about the same number of jobs as it did nine years ago, when the state was home to 3.3 million fewer working-age people.”
September 7th, 2009 at 4:24 am
That wouldn’t be so bad except we’re in Imelda Marcos’s closet.
Dat was a good one.
September 7th, 2009 at 11:16 am
There are banks, and there are banks, much like rich cousin, poor cousin, or rtather privileged cousin who gets to feast on free food, and the the underprivileged cousin that gets to starve
a look at BKX versus KRX tells the story of who is feasting and who is not