Has the Economy Hit Bottom? Reports on Increasing Defaults on Commercial Real Estate Loans Say "No"

There is a feeling that the economic downturn has hit a bottom and the economy is headed up.

U.S. stock prices are surging. The housing market is showing some signs of life. The latest economic reports were not as bad as many expected.

The change in the "mark to market" accounting rules is helping the banks' quarterly numbers reach the highest level in several months.

The Obama administration is cautiously optimistic that the economy has made a turn to the upside.

But is this the recovery we are hoping for?

I feel that in order to see a true, long-lasting recovery, two things must occur.

First, there must be stability in the real estate market, especially in home prices. Secondly, there must also be a recovery in the banking and financial sector.

In March, new home sales went up by 4.7% over the previous month. This may appear to be a rebound in housing. But the March new sales number was actually 41% below the previous year. The monthly increase in sales was primarily due to fire-sale prices. Median home prices fell by 18% on a year to year basis, the biggest decrease ever recorded.

In addition, the number of Americans who are falling behind in their mortgage payments continue to rise. The result is more foreclosures and further downward pressure on home prices. For a more detailed look at this subject and to explore its impact on you, check out, "President Obama Mortgage Relief Plan-Will it Stop the Decline In Housing Prices? " The decline in the housing prices has not come to an end.

But now banks are faced with nearly $700 billion additional losses due to defaults in commercial real estate loans.

Banks have reported over $800 billion in losses since late 2007. Most of these losses have come from bad residential real estate loans.

But commercial real estate prices are plunging. For example, the John Hancock Tower in Boston is considered a prized property. It is the tallest building in New England. It was purchased in 2006 for $1.3 billion. It was recently sold in a foreclosure auction for $660 million, a 49.2% decline in value in just 3 years.

According to the Wall Street Journal, "Commercial real estate loans are going sour at an accelerating pace."

The delinquency rate on $700 billion in commercial real estate loans is soaring. It has doubled in the last 6 months. Although the rate is small, it is the direction of the change that is so important.

About $525 billion worth of commercial mortgage loans held by bank and Savings & Loan entities in the United States are coming due in the next 3 years. And nearly 50% of these loans can't be refinanced because of the tight credit market.

Experts say that banks may be exposed to $680 billion in losses in commercial real estate and commercial mortgage-backed securities.

When you combine the $800 billion in losses already taken by banks from residential real estate with the $680 billion in potential commercial real estate losses, this indicates that banks may only be at the half way point for total bank losses and asset write-offs from real estate.

Here's Another Major Problem

Most of the losses due to home mortgage defaults are being suffered by a few of the largest banks. But hundreds of small and medium-sized regional banks and financial institutions took on a significant amount of commercial real estate loans during the boom years. At the end of 2008, there were approximately 3,000 banks and thrifts having over "300% of their risk-based capital" tied up in commercial property loans.

As a result, small to medium-sized banks could see much more devastation in the second phase of the financial crisis.

The bottom line is that we are far from reaching a bottom in this economic downturn.

As always, my recommendation is to have a backup plan, a Plan B, in the case of this economic mess affects your family's income in a negative way.

Scott Hubbard has retired from 25 years as a Chief Financial Officer in Corporate America. He now enjoys teaching corporate executives and network marketers how to apply attraction marketing online and how to generate free qualified MLM leads on the internet.

You can reach him toll-free at 877-878-4036 or by email at Scott.Hubbard3@gmail.com.