Commercial Real Estate Loan Defaults Will Sink Big Banks

I have read many articles that are stating facts that the mainstream media is not covering.  The most important one is that commercial real estate loans are defaulting at an alarming rate.  While the mainstream media continues to debate whether or not the residential housing bust has reached it bottom they continue to ignore the greater problem of bad commercial real estate loans.  My prediction is that the commercial real estate loan defaults will finish the bank killing that the residential bubble bursting started.  I believe that most, if not all, of the major national banks (think Wachovia, Bank of America, Wells Fargo, etc.) will need to be nationalized within 12 months.

The expected massive bank failures will further curtail lending (including home mortgages) and result in further softening of home prices, particularly in over-built areas of the US.

Duplicating Disaster: A Lesson Not Learned

According to this New York Times article, Sweetening the Pot for Home Buyers, the $8,000 Federal Tax Credit for first time home buyers created by the Obama administration will not have much of an impact (I believe I told you this previously) due to most first time buyers not having enough money for a down payment and to cover closing costs.  The article trumpets a Missouri plan that allows home buyers to borrow that $8,000 to buy that home and then to repay it when they receive the tax credit.  In my opinion, this is a recipe for more disaster.  The problem was and is that TOO MANY FINANCIALLY UNQUALIFIED PEOPLE PURCHASED HOMES.  Offering this "loan" will only exacerbate the problem.  If a person cannot find a way to save $8,000 to buy a home then they should not be buying a home.  What happens when the roof leaks, or heating system needs replacement, etc.?  These "home buyers" do not save money, they spend.  That is why they could not even put together a measly sum like $8,000 to buy a home.  The problem is that we have turned owning a home from a privilege into an entitlement.  When will we learn!?

My prediction is that if this Missouri program gains traction we will see increased rates of foreclosures for these "home buyers".

Foreclosures Increase as Banks Start to End Voluntary Foreclosure Abatements

According to this Ritholtz.com article, Voluntary Foreclosure Abatements Ending, banks are starting to end their volunatry foreclosure abatements due to the increasing number of delinquent loans piling up.  This is after the banks have changed the definition of a delinquent loan from 60 days to 120 days and even 180 days.  Per my previous post, the banks are trying to make things appear better than they are.  Mark my words, it will fail.

Government Meddling and Banks' Incompetence Will Cause More Home Price Declines

According to this RISMEDIA article, Are Banks Withholding Foreclosed Homes to Prop Sales?, banks are only marketing 30%-50% of the foreclosed homes they have on their books.  The article cites the possible reasons for this including government intervention in the form of foreclosure moratoria, banks' hopes that the government will offer them more than the foreclosed homes are worth and banks' unwillingness to take the losses now.  Unfortunately, I predict that the result of all of this is ultimately going to be a flood of these foreclosed homes coming on the market all at once whent eh pressure finally builds up to a peak, or a continued foreclosure problem for years to come as these homes keep coming onto the market even after the foreclosure problem has subsided.  The fact is you cannot escape reality forever.

Prices Still Need to Decline to Make Homes Affordable Again

According to this Forbes.com article, How Low Will Real Estate Go?, home prices need to decline substantially in or der to bring them in line with median incomes, especially given the rising unemployment and increasing foreclosures environment.  Predictably, the article lists the top 10 (or worst 10) markets as being in Florida, California, Arizona and Nevada.  However, even outside these devastated markets other markets in the US will still decline with may seeing double digit declines.  This will result in more homeowners being underwater (i.e. negative equity), which has been shown to increase foreclosures, which in turn increase the rate of home price decline thus creating a nasty cycle of home price declines.  This will continue to get worse for the next 1-2 years.