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Tuesday, May 16, 2006

Loan Officer Survey - Commercial

The Fed has released its loan officer survey (pdf, 33 pages) of lending policies for the last few months. (Main chart) The summary:
In the April survey, domestic commercial banks reported a further net easing of lending standards and terms for commercial and industrial (C&I) loans, while lending standards on commercial real estate loans reportedly were unchanged. At U.S. branches and agencies of foreign banks, lending standards on both C&I and commercial real estate loans were little changed, on net, but like their domestic counterparts, foreign institutions reported a net easing of terms on C&I loans. Demand for both C&I and commercial real estate loans at domestic banks had changed little over the previous three months. By contrast, foreign institutions experienced, on balance, weaker demand for both C&I and commercial real estate loans over the same period. In the household sector, credit standards on residential mortgages and consumer loans were little changed, on net, during the survey period. A moderate net fraction of domestic respondents reported weaker demand for mortgages to purchase homes, while a larger net fraction saw weaker demand for consumer loans over the past three months.
This provides no foundation at all for the dire scenario predicted by The Telegraph (see yesterday's post). It does point to just how inflated the real estate market had been, because once again it appears that what has disappeared out of that market on the demand end were only the investor/speculators. Page 2 of this pdf file contains the chart for household lending. Except for credit cards, credit standards continue to ease for household lending as well as commercial lending. The easing is driven by competition from non-bank lenders.

The current weakness in real estate, then, is being driven by low affordability and the inevitable wearing out of the consumer's ability to purchase ever more expensive housing. It's Real Estate Fatigue. Prices are falling around most of the country:
Real estate gains came to an abrupt halt in the first quarter of 2006, with the median price of a U.S. home falling 3.3 percent from the fourth quarter of 2005, according to a report released Monday morning.
Prices overall were still up 10.3 percent from a year earlier. ... But most of the year-over-year gain was recorded in the first two quarters of the 12-month period.

Sixty markets recorded double-digit gains from a year earlier and 16 metro areas experienced price declines.

However, from the fourth quarter of 2005 to the first quarter of 2006, median prices nationwide fell from $225,300 to $217,900, a drop of 3.3 percent. It's the second consecutive quarter that prices showed a sequential decline; in the fourth quarter of 2005, prices fell 1 percent from the third quarter.
If I were the Fed, I'd stop raising rates and would just let this thing sort itself out. I doubt they can improve matters at this point; they're more likely to accentuate the natural pull back. Precipating a credit contraction is not likely to be productive right now.

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