Housing Sector Leading to Economic Coma
The prognosis is cluttered with vacancies, delinquencies, and foreclosures.
Editor's Note: This article was written by Richard Suttmeier, chief market strategist at ValuEngine.com, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.
The swoon in commercial real estate continues as vacancies at strip malls across the country reached and 18-year high in the fourth quarter, which is a vacancy rate or 10.6%. This deterioration is worse than in the 1988 to 1992 commercial real estate slump. High unemployment and inconsistent consumer spending will continue this troubling trend through 2011 and into 2012.
The Fed minutes from the December 15-16 FOMC meeting reflects this concern. "Conditions in the commercial real estate (CRE) sector were still deteriorating. Bank credit had contracted further, and with many banks facing continuing loan losses, tight bank credit could continue to weigh on the spending of some households and businesses."
One of my predictions for 2010 is that loan defaults and foreclosures will continue to rise. The Fed agrees with the following statement in its minutes:
Bank loans continued to contract sharply in all categories, reflecting lack of demand, deterioration in potential borrowers' credit quality, uncertainty about the economic outlook, and banks' concerns about their own capital positions. With rising levels of nonperforming loans expected to be a continuing source of stress, and with many regional and small banks vulnerable to the deteriorating performance of CRE loans, bank lending terms and standards were seen as likely to remain tight.
The Mortgage Bankers Association reports that vacancy and delinquencies are increasing across all commercial property categories. Vacancies among apartments increased to 8.4% from 6.5% in the third quarter, even with rental rates down 6.0%. Office properties jumped to 19.4% from 16.0%, while retail vacancies swelled to 18.6% from 12.9% with rents declining 8% to 9%.
As a result of this loan deterioration, 6.1% of commercial mortgage-backed securities are behind by 30 days or more in December, up 500% year over year. The unpaid balance is $38 billion up 440% year over year. Because of this, community and regional banks have tightened lending standards on commercial loans and are reluctant to refinance maturing construction and development loans.
In sum, my theme is that Main Street woes will trump Wall Street hype in 2010. A return of economic weakness will be led by another round of deterioration in the housing market followed by cascading bad loans in the banking system. As loans and foreclosures continue to rise, home prices will resume a decline, the FDIC will close 150 to 200 banks, as the FDIC's list of problem banks exceeds 700. As a result, the FDIC will have to tap its $500 billion line of credit and Fannie Mae (FNM) and Freddie Mac (FRE) drain taxpayer money for an unlimited amount.
Home builders had 235,000 new homes for sale nationwide at the end of November, the lowest inventory level since April 1971. At the same time, Fannie and Freddie have 113,408 foreclosed homes (72,275 Fannie and 41,133 Freddie), which is significant sales competition.
Why didn't we help homeowners early in the crisis? The complaint was "moral hazard" and now those making that complaint face foreclosure. Investors in the mortgage-backed securities should have taken a mandated haircut on both principal and interest. If we did it in February 2008, "The Great Credit Crunch" could have ended with a 3% funds rate by the Fed, not this ridiculous zero percent rate.
In the US Capital Markets all key levels remain in place: The 10-Year yield is between 3.868 and 3.675. Gold is between my annual pivot at $1115.2 and monthly resistance at $1166.7. Crude oil is above my annual support at $77.05. The Dollar Index is below $80.23. The Dow is between my annual pivot at 10,379 and monthly resistance at 10,977.
The Emerging Markets Index Fund (EEM) is up 3.9% in the first three days of 2010, setting a new 52-week high, but it's below my annual resistance at $44.99, where profits should be taken.
The China 25 Fund (FXI) is up 5.5% in the first three days of 2010, ending Wednesday pennies above my annual pivot at $44.53, which is the first level at which to book profits.
Send me your comments and questions to Rsuttmeier@Gmail.com.
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