Is commercial real estate the next crisis?
The news has been filled today with headlines about how U.S. housing starts reached a nine-month high in August. According to the Commerce Department, housing starts rose 1.5% over July to an annual rate of 598,000 units. Analysts are touting the news as proof that the recession is over and the economy is on the rebound. But, are they seeing the economy through rose-colored glasses and ignoring the next crisis?
If you really look at the numbers, you will see a growing problem. Single-family home starts, which is the largest segment of the housing market, actually fell 3 percent last month after increasing the previous five months. This previous increase was partly due to the government's $8,000 tax credit for first-time home buyers that shifted demand for homes forward. The number of home buyers is drying up and once the credit expires, the numbers are sure to drop further.
The multifamily housing sector provided the most growth with an increase of 25.3 percent. This increase in apartment units adds to an ever expanding commercial real estate (CRE) bubble that has the potential to once again drag down the economy.
Currently, there is approximately $1.8 trillion in CRE loans on bank books with 19 of the stress-tested banks holding $600 billion of the loans. With prices down 39% from 2007 levels and delinquencies on the rise, the $900 billion commercial mortgage-backed securities market runs the risk of mirroring the crash in the residential market that helped bring about the current recession. If the inflated CRE market bubble pops it will mean more bank failures at a time when the FDIC is severely under funded and the government is trillions of dollars in debt. The economy won't look quite so rosy then.
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