The Housing Market and Community Banks Will Continue to Drag the Economy

by: Richard Suttmeier
The Fed’s Beige Books are the gossip columns from the 12 Fed Districts, and the anecdotal evidence shows that despite some economic improvements, the housing market continues to be a drag, and that community banks are still reluctant to lend. The FDIC Quarterly Banking Profile is the balance sheet of the U.S. economy, and nearly 60% of all community banks still face balance sheet stress that makes it difficult to increase lending, as noncurrent loans continue to be a burden.
The latest Beige Book released on Wednesday showed that economic growth continued to expand at a modest to moderate pace in January and early-February. The major headwind has been residential real estate activity and some Fed Districts reported a slight increase in activity, but the overall level of home sales and construction remained low. Nonresidential construction was described as weak.
In a separate report from the FDIC, their Quarterly Banking Profile for the 4th quarter showed continued stress among the community banks that provide funding to real estate lending. Overexposures to Construction & Development Loans and Commercial Real Estate Loans continued. This correlates to the Beige Book reporting that credit standards were unchanged to tighter.
  • The FDIC List of Problem Banks rose by 24 in the fourth quarter to 884 from 860, which is 11.5% of the 7,657 FDIC-insured financial institutions.
  • 1,265 community banks remain overexposed to C&D loans and another 1358 are overexposed to CRE loans, which includes nonfarm and nonresidential real estate loans. The total of 2623 community banks is 34.3% of all banks that still needs to unwind risk exposures.
  • Looking at Pipeline Risk, which is the ratio of CRE loans to CRE loan commitments, 4479 community banks have a Pipeline of 80% or higher, which is 58.5% of all FDIC- insured financial institutions.
  • Total Assets in the banking system declined $51.8 billion in the 4th quarter 2010 with C&D loans down $32.5 billion. Even so C&D loans still total $321.6 billion with nonfarm, non-residential real estate loans at $1.07 trillion, and problem loans continue.
The housing market thus remains a drag on the U.S. economy, and the network of community banks are not fit financially to increased lending to homebuilders and to potential home buyers. This environment caused the 2008/2009 Recession and since the environment is not improving, housing and the banking system can again drag the economy into a double-dip. I have been calling it "The Great Credit Crunch" since March 2007, and the crunch continues in 2011.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.