When Timmy Speaks, Do People Listen?Friday, October 30, 2009
There is no commercial real estate crisis on the horizon.
“I don’t think so,” Geithner said, when asked whether commercial real estate could set off another banking meltdown. “That’s a problem the economy can manage through even though it’s going to be still exceptionally difficult.”
Driving through the Detroit suburbs provides a sobering look at the commercial real estate crisis that’s been with us for some time. The best way to describe it is, “(almost) everything is vacant.” Professional buildings, strip malls, indoor malls, free-standing large buildings – all kinds of empty shells. Timmy doesn’t read the news.
The same conditions that caused the residential bubble — including the Fed’s easy credit, lax lending standards and booming mortgage-backed securities underwriting on Wall Street — also drove commercial real estate overvaluation.
The 18 percent price decline in second quarter was the largest quarterly drop in the 25 years since MIT first published the commercial real estate price index. Most commercial properties bought or refinanced in the last five years are now upside down on their loans — with current property prices having fallen below the finance or purchase price. Real Capital Analytics reports that owners have lost their entire down payments on about $1.3 trillion worth of property.
Nearly half of all the commercial real estate mortgage loans in the U.S. are coming due within the next five years. Deutsche Bank believes that 65 percent or more of these loans will fail to qualify for refinancing.
Here’s some oldies but goodies from the TreasurySpeak archives:
- Hank Paulson saying there is no recession.
- Hank Paulson saying that we had hit bottom on the housing bust (2.5 years ago)
- Hank Paulson consistently telling the media that the subprime crisis was contained.
Fundamental factors–including solid growth in incomes and relatively low mortgage rates–should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.