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Issue 19 • April 8, 2009 The Next Real Estate Disaster Unfolding Now ...
In fact, far from the worst being over, in reality we may be ONLY at the half-way point in this crisis. Let me explain why...
As I have pointed out before in Weiss Advice; there are two key issues that must be addressed, in my view, before any lasting recovery can begin in financial markets and the economy:
Last month, new home sales unexpectedly inched up 4.7% from the month before, which perhaps gave investors false hope about a rebound in housing. While the headline number was indeed positive, details (where the devil always lurks) showed that new home sales still plunged -41% from the same time last year.3
Also, the number of Americans falling behind on their mortgage payments continues to rise — up 50% according to the most recent data.5 This signals more foreclosures are likely to occur in the future, which means more downward pressure for home prices, as banks unload even more repossessed homes at fire-sale prices! Bottom line: There is no sign of stabilization in real estate markets yet. By association, this means more potential losses ahead for the banking sector too. In fact, there are growing signs of another phase in this real estate crisis that could spell double-trouble for banks ... this time in commercial property markets. The Gathering Storm in Commercial Real Estate
Banks have reported over $800 Billion in losses since late 20076, most of it the result of residential real estate loans gone badly. But now, banks face nearly $700 BILLION in additional LOSSES due to plunging commercial real estate values!7 This is the next shoe to drop and it will compound the crisis that put our economy in a tail-spin, and provide another body-blow to bank balance sheets. “Commercial real estate loans are going sour at an accelerating pace,” according to a recent article in the Wall Street Journal.8 Here are the details:
The result: banks and investors around the world may be exposed to another $680 BILLION in potential LOSSES from bad commercial real estate loans and mortgage-backed securities.12 That’s on top of the $800 billion in losses already taken from residential real estate! In other words, we may only be at the HALF-WAY point for total bank losses and asset write-offs!
At the end of last year, nearly 3,000 banks and thrifts had “over 300% of their risk-based capital” tied up in commercial real estate loans! So the devastation to small- and mid-sized lenders could ultimately be much worse in the next phase of this financial crisis.13 I doubt the government has a TARP big enough to cover all these TOXIC losses on bank balance sheets! Government “stress tests” of the largest U.S. banks and financial firms are due to be completed soon. Who knows which banks will “pass” or “fail?” In next week’s issue of Weiss Advice, I’ll share my expectations with you ... and show you why I believe banks are only papering over their problems. Plus, the Financial Accounting Standards Board just caved-in to political pressure and has decided to “go soft” on mark-to-market rules ... I’ll explain how this sell-out may only prolong the pain of this financial crisis. So stay tuned. Good investing, P.S. The growing crisis in commercial real estate could easily trigger the next big decline in this devastating bear market. Recently, we held a special video briefing: Phase II: Bear Market UPDATE that provides details on our outlook. If you haven’t watched this video, click here NOW. The replay will go off-line next week. 1 Bloomberg: “S&P 500 Can’t See Enough Money to Feed Stocks’ Rally”, 4/6/09 Disclaimers: 1. Weiss Advice is a publication of Weiss Capital Management, an SEC Registered Investment Adviser. Weiss Research is a separate, but affiliated publishing company. Both entities are owned by Weiss Group, LLC. 2. "Weiss Advice" is published for general information and educational purposes only and should not be construed as a specific recommendation to buy or sell any security. Specific recommendations can only be given to advisory clients of Weiss Capital Management, with the benefit of knowing their financial condition and suitability. View Weiss Capital Management's Privacy Policy. To make sure you don't miss our urgent updates, add Weiss Advice to your address book. Just follow these simple steps. |
Banks have already suffered $1.3 TRILLION in credit losses and asset write-offs since 2007.
Most of us are painfully aware that we are in the midst of the WORST bear market in residential real estate since the Great Depression. U.S. home values have plunged nearly 30% in just three years since housing peaked.
And it would appear that the biggest boost to sales last month came from fire-sale prices. Median home prices fell 18%, which is the largest year-over-year decline EVER recorded!
In fact, delinquency rates on about $700 billion of real estate loans on office buildings, hotels, stores and other commercial properties ... have more than DOUBLED in the past six months alone.
And while the majority of home mortgage losses are being suffered by only 10 or so big banks ... hundreds of small and regional banks nationwide loaded up on commercial real estate during the boom. 
