“YA GOTTA BUY REAL ESTATE; AFTER ALL, THEY’RE NOT MAKIN’ ANY MORE OF IT!”

10/7/09

This morning’s (i.e., Wednesday, 10/7’s) Wall Street Journal reports that a real estate expert at the Atlanta Fed, Mr. K.C. Conway, who, one might think, judging from his name, but apparently not the intensity of his insight, should have pursued a career either as an NFL running back or an R&B singer, has issued a report on the impact the cratering of the commercial real estate market will have on banks. Among other insightful observations, the report states:

“Banks will be slow to recognize the severity of the loss—just as they were in residential (real estate).”

A much more highly placed, but much less beneficially named, Fed official, New York Fed President Bill Dudley, confirmed the wisdom of Mr. Conway’s observations in a speech Monday in which he said

“More pain likely lies ahead for this (the commercial real estate) sector and for those banks with heavy commercial real estate exposures.”

The Journal further reports that, based on its analysis of data from 800 banks, commercial banks had, at the end of the second quarter of this year, 38 cents in reserves for every dollar of bad commercial real estate loans. This was down from $1.58 in reserves for every dollar in bad commercial loans at the beginning of 2007. Apparently, we have a case of non semper paratus, unless, of course, commercial real estate is turning around. But all one has to do is turn off CNBC and drive down one’s local commercial strip to see how badly commercial real estate is hurting.

None of this should surprise anybody, especially readers of the Insightful Pontificator. I was not the only one sounding the alarm bell on the commercial real estate front when, in my 4/20/09 post, I stated:

Even if the housing market is improving, some combination of the following four should blow up in the next several months with devastating consequences both for the real economy and for the psyche of investors who really think we have turned the corner on the aftermath of a twenty year display of financial foppery:
--life insurance companies, primarily through their variable life and annuity contracts.
--credit cards—big time.
--municipal bonds
--commercial real estate

These have already blown up, you say? Think again.

If Messrs. Conway, Dudley, and Quinn are right, we may soon have to live through the same financial dystopia that we experienced last year. Why? Because, in what has become a new recurring theme in the Insightful Pontificator, some people never learn. They simply react and chant.

In other hopeful economic news of the type I find useful, I have seen no decrease in “For Sale” signs in the ultimate suburb in which I live. These signs are spread across virtually every pricing point available out here, but the preponderance of such advertising lies in the ostentatious “McMansion” sector of the market. Some of these monstrosities for sale are of the unoccupied variety, but more seem to be occupied, presumably of the “I just had to buy more house than I could afford because I finally got a few bucks ahead and had to display my wealth but wound up only displaying my economic and financial illiteracy” variety. This is not to say that more homes are for sale than ever before in Naperville, only that I am seeing more “For Sale” signs than ever before. And I like anecdotal evidence.

Also on the anecdotal front, a friend and I are in the habit of having lunch weekly and discussing the world’s problems and our brilliant, but unheeded, solutions thereto. Usually, our choice of restaurants is dictated by the availability of coupons, and whenever they have a “Buy one meal, get one free” coupons, we generally choose our local IHOP. The food is good, the service is terrific, my iced tea glass is never allowed to run dry, and the prices, while very high without a coupon, are reasonable with a coupon. The “busy-ness” of IHOP, and similar restaurants, has been a near perfect economic indicator for me, ebbing and flowing just ahead of the vicissitudes of the economy. After seeming to perk up during the last round of coupon availability, about two months ago, business at IHOP has been down, and down big, in this latest round of coupon availability, which started three weeks ago. In fact, we have never seen the restaurant as dead as it was yesterday.

So the commercial real estate market has not stopped plummeting, the housing market, at least at the upper middle end, still stinks, and the IHOP indicator has never been more negative. Yet stocks are up well over 50% from their bottom. Something isn’t right here.