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There was a stunning series of charts in the latest Fed Survey on Bank Lending Practices.

Measures of Supply and Demand for C&I Loans



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Measures of Supply and Demand for Consumer Loans




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Measures of Supply and Demand for Commercial Real Estate Loans



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The above charts show a huge drop in the willingness of banks to lend and the willingness of consumers to borrow. Those charts are in addition to the obvious fallout in subprime residential.

Car Dealers: 'Tenuous financial state' leaves consumers wary

New car sales fall as buyers shun debt

New car sales slumped in San Diego County and the rest of California through the first nine months of the year, as debt-laden consumers stayed away from car lots despite rock-bottom interest rates and other inducements, according to the latest data from the auto industry.

The California Motor Car Dealers Association noted that “many California households are in a highly tenuous financial state” after running up credit card bills and mortgage payments over the past several years.
<strong> Bond Issuance Plunges

The Financial Times is reporting Bond issuance plunges amid credit fears
Bond issuance by the world's biggest banks has plunged in the past week as concerns grow over further balance sheet losses because of the credit squeeze.

There have been only 11 bank bond deals since Monday last week - a third of the number of deals priced in the previous week as some financial institutions are forced to stay on the sidelines because of the tougher market conditions, according to Dealogic.
Alternate View Of Commercial Real Estate

Pointing to the CMBX indices I noted yesterday that Commercial Real Estate Heads South.

Professor Zucchi offered a balancing viewpoint in Monday's Buzz and Banter.
Minyans probably know that I am no Pollyanna on anything real estate, residential or commercial, and darkside positions in iShares Real Estate (NYSEARCA:IYR), CoStar Group (NASDAQ:CSGP) and Jones Lang (NYSE:JLL) remain firmly in place. ...

However, I'd caution not to go overboard with the negativity yet. ...

I think it is worth highlighting again the critical differences between what's happening in residential real estate and the exuberance we have seen in commercial real estate. The residential price bubble was driven by small speculators gambling on the greater fool theory with 100% or more leverage. No “greater fool” and the default is almost inevitable and swift.

High CRE prices on the other hand, have been driven by somewhat silly expectations for higher rental rates, as well as further capital gains; if those fail to materialize, buyers will have rather putrid returns (particularly vis-à-vis expectations), but lease renewals at existing or at even lower rental rates would likely be more than sufficient to cover the existing debt service. More often than not CRE properties have not been leveraged up until after the owner secures new bankable leases (typically 10-yr. terms) which can support the increased debt.

As a corollary to this, while the cost of insurance of CRE debt has increased, there are still no signs of any meaningful debt defaults outside of what is normal in any credit environment.

So yes, risk levels in commercial real estate have increased, but I believe that is as much a function of where they are increasing from as it is of the current turmoil in the financial markets. But the coming “pain” in this sector will be measured by skimpy "returns on capital" rather than wipeouts in the "returns of capital".
This is a friendly game of ping-pong I am playing with Professor Zucchi.

On residential real estate we are even standing on the same side of the table as evidenced by Housing Woes and Pain Avoidance.

As for commercial, Professor Zucchi has stated his point well. Still, I cannot get out of the back of my head the idea that commercial rates are going to collapse, rising insurance or maintenance costs become problematic for the owners, and/or revenues drop dramatically.

Possible Scenario
  • Bankruptcies rise. There is an involuntary exodus of tenants.
  • Vacancies rise voluntarily. There is a voluntary exodus of tenants to cheaper locations. Perhaps the "anchors" lock in for 10 years but I doubt they all do.
  • As a result of the above, owners are forced to lower rents to keep tenants.
  • Heating, insurance, and mortgage payments rise above rental rates and occupancy.
  • Eventually, assuming this plays out long enough, insolvency results.
  • This can play out much faster if the progression of problems is much faster.
There is also a difference between major malls, few and far between, and thousands of strip malls sprouting up everywhere. The problems are likely to appear first in the latter. Where is the larger investment? For smaller regional banks, smaller projects undoubtedly are.

Commercial Rental Mailbag

Here is an interesting comment I received just yesterday from a reader about commercial rentals.
Mish,

As someone who has commercial rentals, most people have no idea how bad its going to get.

My family has a bunch of multifamily units in the wonderful town of Cape Coral, Fl.
The only thing keeping us solvent currently is that everything is paid for. Our occupancy has been way below 80% for over a year. The rents are currently at about 600.00 a month per unit. The rents were 475.00 when the parents bought em in the early nineties. The high point a couple of years ago was about 750.00.

I honestly do not know how anyone is staying solvent with the current occupancy rates and rental prices.

Chris
Attitudes Change

Heading back to the original theme, it is clear the attitudes of lenders and borrowers are both changing.
  • Residential Real Estate shows it.
  • Commercial and Industrial lending shows it.
  • Bond issuance shows it.
  • Consumer loans show it.
  • Auto loans show it.
The excesses of the past cycle, spurred on by the most reckless Fed ever, were the greatest in history. And with that recklessness the tenacity of the current trend in consumption has been nothing short of amazing, especially in regards to housing.

However, housing in not coming back for a long, long time. Boomer demographics suggest the same will happen to consumption habits in general. Certainly retired boomers are not going to continue spending whatever equity they have in their house forever. To top things off, protectionism is on the rise. Protectionism inevitably decreases demand.

All trends end. More importantly, they all end at the precise moment they do the most damage. It simply must be that way. Trends run until they exhaust themselves. Housing peaked with the cover of Time Magazine going "gaga" over real estate. Who was left to buy?

The same applies to commercial real estate, the percentage makeup of financial stocks in the S&P 500, and even consumer spending habits. Secular changes are now underway in all of those areas. Those who do not adapt to the sentiment changes at hand will simply be left in the dust.
Source: Lending Sentiment Drops Dramatically