Worries about the commercial real estate market in the U.S.
For a while now, I have come across many references to the looming problems in the commercial real estate market in the U.S. and so over the last couple of days, I have tried to learn more about this. In many ways it seems similar to the sub-prime and the Adjustable Rate Mortgage crises (the first already blew up, many think the second will do so soon). In those two, questionable lending, coupled with the expanding housing price bubble, puts pressure on both home-owners (if they lose their job say) and banks (who either lent the money or bought some mortgage-backed secutiry with the loads bundled into it). The difference is that the sub-prime mortgages had reset rates (when the interest rate on the mortgage was set to change, upward of course) that were just a couple of years. The ARMs had longer reset rates and so are starting now, with the majority coming due in 2010 and 2011. Similarly, commercial real estate loans that were provided at the height of the real estate bubble are coming due in the next couple of years (since commercial real estate loans are much shorter than home mortgages). And it seems there is a lot of commercial real estate losses out there. Doug Horning at the Market Oracle writes:
The real tsunami is coming, probably in the second quarter of 2010, Andy estimates. Because that’s when banks will have to start preparing for the wave of mortgages that were written near the market top and are maturing in 2011-12. Unlike home loans, commercial loans tend to be relatively short-term in nature (average 5-7 years), because – outside of apartment building loans backed by Fannie or Freddie – there are no government programs to subsidize longer-term ones. These guys mature in bunches.
According to a recent Deutsche Bank presentation, the delinquency rate on commercial loans as of the end of 2Q09 was greater than 4%. Of these, they expect that north of 70% will not qualify for refinancing. Imagine what will happen to the estimated $2 trillion in commercial mortgages that mature between now and 2013.
And even that is not the end of it. There’s a second huge wave on the way in 2015-16.
Yikes.
And for more market gloom, see these sources:
Peter Eavis, “A sector too Tough to Save,” Wall Street Journal, Novermber 19, 2009 http://online.wsj.com/article/SB40001424052748704533904574543984032502904.html
Norm Alster, “Commercial Real Estate Loans a Grwoing Problem…” Lexis/Nexus, Novermber 3, 2009. Available at http://www.allbusiness.com/real-estate/commercial-residential-property-commercial/13388868-1.html
And here is an article (blog post) that puts it all in perspective (the commercial real estate issue is mentioned at the very bottom):
“Subprime Meltdown Over; Now Comes the Bad News,” June 1, 2009. The Ecomomic Populist, http://www.economicpopulist.org/?q=content/subprime-meltdown-over-now-comes-bad-news
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The extremes of the housing bubble
I have been reading a lot of the posts at Dr. Housing Bubble (DHB) recently… mostly out of morbid curiosity I guess. But to illustrate all of the crap that has been going on in this financial crisis, I can think of no better examples than the price histories of some of the homes documented at DHB. Here are three that I find frightening. Most of these home, I would not pay more than $100,000 Canadian for… let alone what they were being flipped for or what banks thought they were worth in providing equity financing (well, except for the first example perhaps) and some of them I wouldn’t buy at all:
Example. 3 (these ones are simply pathetic)
I really cannot grasp the kind of thought process that would produce a system whereby these homes would be priced at the levels they were in the recent past. But, then, after looking at these home and these prices, is it any wonder the world is in such a financial mess?
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Has the ‘recession’ ended yet?
There have been a lot of negative economic indicators which have caught my eye these last weeks. I can understand that politicians, bank officials, investment bankers, federal bankers, et al, need to keep up appearances since public panic is bad. The general media landscape basically displays denial and wishful thinking (“Does THIS indicate that the recession might be over?). There is some acknowledgement in the mainstream press (mostly online or in newspapers) but commercial TV news tends to be an abomination, especially business news and the commercial/cable networks in the U.S.
At any rate, sometimes there are some weird things that one comes across… such as how to survive economically in this completely topsy-turvy environment? Well, I came across these comments in an article I read recently which shows how resourceful people can be when facing difficult times:
Comment by Swiller
October 30th, 2009 at 10:42 am
ROFLMFAO!!!! “Welcome to YOU JP Morgan”. Oh I love it. When I asked to get a loan workout in 2008, WAMU/Chase refused to work with me. When I edfaulted for 3 months, they put me on a “trial plan”. I completed the 3 month plan, met all HAMP reqs, yet still wasn’t sent the loan mod. Now I’ve not made a payment for another 60 days, still no loan mod. 150 days of no payments and no NOD. If they file NOD, I wait until 1 day before auction and I declare a bankruptcy.
They *could* work with us homeowners, but they are forcing the foreclosures. Big deal, if I get 12 months of no payments, I can mattress a ton of money. Just remember, YOU voted for these people who allowed this FRAUD to happen, now everyone gets to pay for it.
P.S. Anyone want to buy my condo that’s $100,000 underwater? I didn’t think so….guess Chase will suck up the loss…you always wanted to run the whole country JP Morgan….welcome to California, I’m glad you aren’t getting a dime from me
BTW I love your blog!
I understand where this person is coming from, even though his attitude makes it sound that he does not care about taking tax-payers’ money. In the super-charged political and ideological system that is the U.S., and where the desire to make money is turned into the premiere ideal ruling society, it means that virtually anything is allowed when it comes to economics. So, the same system that produced the financial crisis also turns out this reaction by one of those caught in its web. And, I guess, this home-owner is just playing by the rules that produced the bankers and investors and their actions.
Over the past few years, I have been coming to see the effects of the whole Cold War, capitalism-versus-communism struggle in terms of its impact on the discourse and propaganda in the economic public sphere. This religious adherence to capitalist ideology is something that I tended to ignore in favour of the effects on militarism and foreign policy. But now I think I am beginning to see the interdependence of it all… and it is a little scary. The U.S. (and Canada I guess) will have to start looking more rationally at the problems facing the world and a little less through the ideological glasses as we have done in the past.
I have old friends that have moved to California and are therefore in the midst of it all. I hope they are doing OK.
Will there be two financial crises int he U.S.?
A while ago (probably over a year now), I stumbled across an interesting websit covering the housing market (or bubble) in California and I have returned to it from time to time as it seemed to have very in-depth and reliable information: Dr. Housing Bubble (http://www.doctorhousingbubble.com/).
Today, I visited the site because I wanted to re-read the information about Adjustable Rate Mortgages as I had read about these before and remembered that they represented another wave of toxic assets. In the graph above, the sub-prime mortgages (shown in purple) which were the catalyst of the current financial meltdown were scheduled to reset in a way that appeared as a normal bell-shaped curve. Likewise, the Option ARMs (shown in blue) are scheduled to do so but at a later time; essentially beginning in 2010. The central trough, with the red, vertical line, is basically where we are sitting right now. So, this essentially means that there is the potential for a lot more people defaulting and perhaps even walking away from mortgages/homes and then showing up as toxic assets on the balance sheets of banks.
Needless to say, the people behind Dr. Housing Bubble are not optimistic about what this means, especially since the majority of these mortgages are located in California, Florida, Nevada, and Arizona. All of these states have suffered a great deal already and what this will mean for the U.S. economy specifically and the world economy more generally is dificult to face. Anyway, if you have the stomach, two of the most interesting posts at Dr. Housing Bubble are available here and here (the latter is the post from which I borrowed the graph).
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The next right-wing political bimbo in the U.S.?
I vistied CNN’s website to see what the reaction to Lou Dobb’s resignation was like and I stumbled across this video:
http://www.cnn.com/video/#/video/bestoftv/2009/11/11/lkl.prejean.upset.cnn
Apparently, she is or was Miss California and I have hazy recollections of her remarks about gay marriage or something. Anyway, she appeared on Larry King Live but walked out after he asked her ‘inappropriate’ questions as to why she settled out of court with the pageant after she initiated a law-suit alleging religious discrimination. King’s question was an interesting one: he wanted to ask why she settled instead of pursuing the lawsuit which, I guess, she said was a matter of principle and religious freedom. Perhaps she didn’t understand the question but I suspect the whole thing was a pre-planned publicity stunt. She apparently has a book out (whoa, can’t wait to read that!) and she started the interview saying she admired Sarah Palin and that she, like Palin and another wack-job Michele Bachmann, have been attacked by the liberal, left-wing media. It would seem to make sense because walking out on an interview with a mainstream media elite journalist like Larry King would work well with the Fox-Tea-bagger crowd. Oh wait… she didn’t storm or even walk off. Around the middle of the video, she nods to someone off screen (probably her publicist or political handler) and takes off her microphone and then… just… sits there (???).
At any rate, it appears to me we have yet another bimbo who wants to break into the ranks of Sarah Palin, Michelle Malkin, Michele Bachmann, and that skinny blonde anorexic woman whose name escapes me at the moment, to become another right-wing hot chick who is willing to make up and say virtually anything in order to rile up the troops.
*Sigh*
It really is depressing to see where U.S. politics is headed and I am not just blaming the right as there are plenty of ‘whack-jobs’ on the left as well. When that country is, in all liklihood, facing the beginning of the end of its empire and global hegemony and faces such daunting problems, it is people like this that tend to get the most airplay.
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