By KELLY GEBERT
Last week the Dow Jones Industrial Average passed the 10,000 mark for the first time in a year. Many cheered this development believing that resurgence in the stock markets delayed economic recovery.
At the risk of being overly doom-and-gloom the real estate markets are poised yet again to crash. Such a situation is likely to trigger a second wave of foreclosures on commercial and residential properties across America, pulling down recently recovering construction bond and equity markets.
Rising foreclosures means more consumers are defaulting on their mortgages. Many of these defaults are on loans made by banks in the last several years that have been structured as long-term loans (30+ years). When a borrower defaults on a $200,000 30-year loan three years in, the bank essentially loses the entire $200,000. The last thing fragile banks need now are more foreclosures to increase the number of bank failures.
Here are three warning signs of a new tsunami of foreclosures from CNN Money’s Katie Benner:
Special Servicers
Firms such as LNR Property, CW Capital, and Centerline are tasked with unraveling the most troubled loans in a last ditch attempt to keep them from default. An uptick in business at these companies means more borrowers under duress.
Big Projects
When rents and property values fall, apartment complexes, malls, hotels, and major projects financed during the bubble become more likely to default on their debt.
Regional Banks
Watch to see how banks such as Fidelity Southern and United Community Banks — identified in a SunTrust Robinson Humphrey report as having a high proportion of noncurrent construction loans — hold up over the next few months. Community banks were especially aggressive in originating commercial real estate loans, but they could still manage to avoid big problems.
On the bright side, allowing the real estate markets to hit their bottom may be the only real way to begin recovery. With prices at rock bottom, commercial and residential markets would hit a real equilibrium and entrepreneurs could swoop up buildings for next to nothing while tenants and buyers will be able to lock into long-term low-priced deals.
This ‘reset’ of the markets would be a boon to real estate and the economy as a whole. Though a reset such as this looks great on paper, the reality is people and businesses will be kicked out of their current dwellings, potentially causing significant damage to the economy as a whole.
Can U.S. markets handle a second foreclosure spree, especially one that includes a large amount of commercial real estate? Sadly, no one has the answer. The best we can do is prepare for the worst while keeping an eye out for opportunities created by this situation.
