Eq: Total Market


All of the worries in the real estate market have been focused on commercial property. While commercial real estate is supposed to be overvalued and over-supplied (a dangerous combo), US residential real estate is supposed to be healthy, with manageable price rises and tight supply. However, the residential market has just gotten some bleak news. US Housing starts plunged by over 12% in June, and new building permits dropped over 2%. The reasons cited for the drop are a lack of skilled workers to build and a higher cost for materials.

FINSUM: The question is whether this is a demand-led problem (new buyers pulling away) or a supply-led one (meaning the supply of everything is too tight). The first would indicate falling prices, the second the opposite.


Three of the foremost experts on Financial Crises—proven by their experience in 2008—have just weighed in on the threat of another Crisis. Ben Bernanke, Tim Geithner, and Hank Paulson have just commented in a joint press conference that while the US financial system has better barriers in place to prevent a crisis, its tool kit should one come is considerably weaker than in 2009. The main weaknesses cited were the massive increase in debt the government has experienced since the Crisis, giving it less room to bail out the market; and secondly, the deep political divisions which could more easily block any bipartisan action that may be necessary to save the financial system. Geithner summed it up this way, saying “Better defenses, weaker arsenal”.

FINSUM: This is some very good insight from the most experienced Crisis fighters out there. All their points sound quite reasonable to us.

(New York)

When big US banks are worried about lending to the commercial property market, one knows things must be getting bad. Big bank executives say they are unwilling to sign off on a number of deals in commercial real estate as the sector looks overheated. For instance, the CFO of JP Morgan Chase said spreads, a proxy for returns, were “under a lot of pressure”. Big banks like JPM and Wells Fargo have been shrinking their exposure to the sector for some time. Market participants say competition in the space is so high that deals no longer provide good risk-return metrics.

FINSUM: It sounds like commercial real estate is maybe just past its peak and headed for a downturn. All of which appears in direct contrast to the residential property market.

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