National Housing Market Outlook

Where Are All the Bad Bank Loans?

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John Burns

December 22, 2010
You are not going to believe this one!
With home prices down 29% from the peak, commercial real estate values down 43% from the peak, residential construction volumes down 77%, commercial construction volumes down 39%, and builders and developers all over the country complaining about the difficulty of getting construction financing, how much do you think that the book value of construction loans outstanding has declined? 90%? 80%? 70%?
Nope. Construction loan balances are only down 44% from the peak, to early-2005 levels. All I can say is that I’m sure glad I am not a Big 4 audit partner attesting to the accuracy of bank balance sheets!
The good news for the many of you who want to purchase these assets is that 19% of these loans are delinquent, and the banks will not hold onto these loans forever. To kickstart construction, banks need to see nonperforming construction loans and REO at a price that makes development feasible. It is very clear to us that the regulators and auditors have allowed many banks to defer taking losses, which is probably the right decision for the FDIC, bank shareholders, and taxpayers. When the banks start selling these loans and REO, construction will increase.

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John Burns
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