Fed signals fears about commercial real estate woes
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The minutes of the Federal Reserve’s last meeting show a board losing hope on a housing recovery, fearful about rising problems in commercial real estate and ‘surprised’ by the pace of economic declines overseas.
The summary of the Jan. 27-28 meeting, released today, indicates that the Fed still expected that ‘a gradual recovery in U.S. economic activity would begin during the third or fourth quarter of this year as the economy begins to respond to fiscal stimulus, relatively low energy prices, and continuing efforts to stabilize the financial sector and increase the availability of credit.’
But a few sentences later, the minutes say that ‘all but a few [Fed officials] saw the risks to growth as tilted to the downside; in light of financial stresses and tight credit conditions, they saw a significant risk that the economic recovery would be both delayed and initially quite weak.’
In fact, the Fed’s official forecast now is for the economy to contract between 0.5% and 1.3% in 2009, which, if it’s on target, still could mean some growth in the second half after further contraction in the first half.
The Fed also admitted to being ‘surprised by the speed and magnitude of the slowdown in economic growth abroad and the resulting drop in demand for U.S. exports. . . . Moreover, participants did not expect foreign economies to rebound quickly, suggesting that net exports would not provide much support for U.S. economic activity in coming quarters.’
As for residential housing, ‘Participants saw no indication that the housing sector was beginning to stabilize,’ the minutes say. ‘Though sales of existing homes appeared to have flattened out, a large fraction of those transactions seemed to have resulted from foreclosures or other forced sales; moreover, new home sales, housing starts, and permits all continued to decline steeply. Lower house prices and mortgage rates had increased housing affordability, but concerns that house prices may fall further appeared to be holding back potential buyers.’
The Fed also signaled growing worries about commercial real estate. From the meeting minutes:
A number of participants expressed concern that the commercial real estate sector could deteriorate sharply in the months ahead. They noted that a large number of commercial real estate mortgages will come due at a time when banks likely will still be facing balance-sheet constraints, the ability to securitize commercial real estate mortgages may remain severely restricted, and vacancy rates in commercial properties could well be climbing. Some participants worried that the outcome could be an increase in defaults on commercial real estate mortgages and forced sales of commercial properties, which could push prices down further and generate additional losses on banks’ commercial real estate loan portfolios. However, the commercial real estate sector had expanded more moderately during the recent expansion than during the expansion of the late 1980s, suggesting that the downturn in the current cycle could be milder than that seen in the early 1990s.
-- Tom Petruno