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March 31, 2010 – Commercial Real Estate Has Been Problematic Since 2003

Problems with C&D and CRE loans began in 2002 / 2003. Consumer Confidence remains in the
dumps. Case-Shiller shows that housing stability is ending. In 2003 / 2004 Fed policy ignored
the long term bottoming patterns on the weekly charts for gold crude oil and stocks.
The focus of “The Great Credit Crunch” has shifted to Commercial Real Estate with includes
Construction & Development Loans. Treasury Secretary Geithner says that CRE loan problems can be
managed, but they have not been as guidelines for risk concentrations versus risk-based capital have
been ignored since December 2006.
I say that the CRE problem began in mid-2003 as that’s when the Greenspan / Bernanke Federal
Reserve pushed the federal funds rate to 1% and kept it there for a year, on fears of a Japanese Style
multi-year Deflationary Economy. The problem in the United States is that this low rate, plus
encouragement from Congress began speculative bubbles in US Treasuries, Commodities, Housing
and Equities around the world.
Community and regional banks around the county increased C&D and CRE loans to every Tom, Dick
and Harry developer, who bought land for communities in places where only speculators or flippers
could earn a buck buying the houses our home builders constructed. Homes finally reached real
homeowners at elevated prices funded by Wall Street created subprime mortgages and derivative
products that were securitized and sold as government-backed around the world. It was the ultimate
greed that was destined to fail. My warning salvos began in mid-2005 for the homebuilders and for
community and regional banks in April 2006.
The surface wound called subprime mortgages was called by our banking regulators as isolated, and
both Treasury Secretary Paulson and Fed Chief Bernanke called the problem contained, and would not
expand to the real economy. Just a month or so before the crisis hit, both called for economic growth in
the second half of 2008 ignoring all the signs I saw in the FDIC Quarterly Banking Profile, quarter after
quarter.
Today, our banking regulators tell us that a zero percent funds rate is still needed for an “extended
period” even though they project above trend GDP growth this year and next. They deny the possibility
of a Double-Dip Recession, but they are afraid to begin an exit strategy, and demand new regulatory
authorities, when current regulatory guidelines have been ignored.
Now the theme is that Commercial Real Estate is going to be a problem for our country, but have no
fear, Tim Geithner can manage the damage. Treasury Secretary Geithner says that the finance system
“is in a much, much stronger position today”, but banks are falling like dominos. Wall Street has been
bailed out by creating four big banks, that are bigger today than in 2008 when they were called, “too big
to fail.”
You cannot have an economic recovery when commercial real estate loans backed by empty stores,
strip malls and office complexes go into default. The most important job creator on Main Street USA is
construction projects, and these are few and far between.
The Congressional Oversight Panel projects that US banks face losses of as much as $300 billion for
loans backed by commercial properties.
FDIC Chair Sheila Bair says that losses on commercial real estate loans will be the primary cause of
bank failures in 2010 and that the number of closures will likely exceed the 140 collapses of 2009.
Consumer Confidence remains in the dumps according to the Conference Board with a reading of just
52.5 in March. Keep in mind that readings would have to be 90 to 120 for consumers to be neutral.
Consumers would not be considered upbeat until this series was above 120.
The S&P Case-Shiller 20-City Home Price Index came in at 146.32 in January, still well above its 100
reading noted at the end of 1999. This index is only up 4% since the May 2009 low and still roughly
30% below the May 2006 high. I have been predicting a renewed home price decline and this
prediction gains credence with 18 of 20 cities showing price declines in January.

The chart above shows that the year-over-year changes in home prices are about break-even from a
year ago.
The chart above shows that the modest up-tick in home prices is rolling over with prices back to the
levels of autumn 2003. Note that home prices are still too high relative to the end of 1999.
Today is month end so I show the weekly charts for Comex Gold, Nymex Crude Oil and the S&P
500 to show how these assets ballooned into speculative bubbles thanks to the Federal Reserve
taking the Federal Funds Rate below 3% in October 2001, and then to 1% between June 2003 an
d June 2004. If only they knew how to read chart patterns.
Comex Gold bottomed just above $250 the Troy Ounce in 2001 and moved above its 200-week simple
moving average in 2002 before the Federal Reserve aggressively cut rates. At $1200 the gold bubble
popped in 2009.
Nymex Crude Oil was below $20 per barrel as the Fed cut rates in 2001 and by April 2001 was above
its 200-week simple moving average. The oil bubble popped in mid-2008, but with a zero percent rate
today, the bubble is trying to re-inflate.
The S&P 500 had a triple-bottom before the Fed pushed the funds rate to 1% in June 2003. That
bubble popped in October 2007. Today SPX is trying to get back to its 200-week simple moving
average at 1225.
Chart Courtesy of Thomson / Reuters

Chart Courtesy of Thomson / Reuters

 Chart Courtesy of Thomson / Reuters

That’s today’s Four in Four. Have a great day.

Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com
(800) 381-5576
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I
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