It should be no surprise to anyone who keeps current on the news that falling real estate prices are one of the major causes of the current bank crises. According to the February 6, 2009 Economic Letter released by the Federal Reserve Bank of San Francisco (FRBSF), the United States homeowners, nonprofits, and corporations hold nearly $38 trillion of real estate assets. These assets are supported by nearly $15 trillion of mortgage debt. When the value of the assets goes down, the risk of default on those assets goes up, creating disaster for the banks holding that mortgage debt.
first tuesday’s take: While the FRBSF’s current stance is that nonresidential bank loans are less exposed to harm by the dropping real estate prices, we believe it’s inevitable that this market correction will take an equivalent bite out of the nonresidential market as well. After all, the fewer people employed, the less the need for retail, industrial, and office space. It’s just a matter of time before bank loans secured by ANY type of real estate are affected, euphemistically called “contagion”.