Increasing Stress on Banks, Lenders

Another shoe is about to drop with a thud on banks. This time, the dropped shoe comes from the condo market.

Nationwide, condo projects are grinding to a halt as developers default on construction loans, and commercial real estate problems are building. This is no surprise due to the struggling economy, but begs the question how the Federal Reserve threaded this variable into the highly publicized bank stress test, due out at 5pm today.

Federal Reserve

The Center for Economic and Policy Research stated in its January/February 2009 issue:

Commercial real estate faces its own reckoning. When the housing market began to fade at the end of 2005, it kicked off a boom in nonresidential construction. In less than three years, this sector expanded more than 40 percent. There is now considerable excess capacity in retail space, office space, hotels, and other nonresidential sectors—leading to falling prices, plunging construction, and another major source of bad debts for banks.

In short, beware the happy talk from those who say we are “turning the corner,” ignore the daily ups and downs of the market, and tighten your belts. This is going to hurt.

Consider the default news from Thursday’s Wall Street Journal:

• Defaults in nonresidential construction loans went from 6.6% in the 4th quarter of 2008 to 8.9% in the 1st Quarter.

• Delinquencies in condo construction loans went from 25% in the 4th Quarter of 2008 to 32% in the 1st Quarter.

Clearly, these increasing delinquencies will certainly ‘stress’ some banks and lenders.

How long will it take for the economy to recover, and the default rate to slow? What should the government do about the commercial real estate problem and its accompanying bad debt, a noose on some banks and lenders?

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