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Two pieces of data on U.S. vacancy rates (one commercial, one residential) show in unequivocal terms that house prices are going to continue lower, while the more-recent collapse in commercial real estate will continue to accelerate.

The U.S. vacancy rates for rental apartments has just hit its highest rate in 23 years – and is set to continue moving higher with new construction vastly outpacing sales. This guarantees that rent prices will drop (especially in an environment of rising unemployment and falling wages). It is equally certain that falling rent prices will translate into falling prices for U.S. residential real estate.

Falling rent prices make buying a home relatively more expensive (not to mention the risk of defaulting on a mortgage should the buyer lose his employment). This will continue to put downward pressure on U.S. house prices – adding to the downward pressure caused by rising unemployment, record-rates of foreclosures, more than 20 million empty homes (including millions of foreclosed properties being held off the market), and the need for retiring baby-boomers to sell real estate to fund their retirements (see “U.S. pension crisis: the $3 TRILLION question”).

The momentary stabilization in U.S. housing prices is nothing more than a combination of months of relentless propaganda proclaiming a “bottom” in this market – along with the minor boost to the economy from the Obama stimulus package, and the normal “seasonal strength” of this market in the summer.

Almost certainly these prices will resume their downward march in the next few weeks. The only thing which could alter this picture is if U.S. inflation (which the government pretends doesn't exist) should accelerate so rapidly that “up” becomes “down”. In other words, if U.S. inflation (currently around 7% in the real world) should heat-up to double-digits, we could see small nominal gains in U.S. prices – which in real dollars would still be steadily depreciating.

Meanwhile, in the commercial sector, the vacancy rate just hit its highest level in 5 years (reflecting the fact that this market hasn't been collapsing for as long as the housing market). It is a certainty that this rate will continue soaring higher – given that both corporate revenues and corporate earnings are still plunging downward at double-digit rates (see “Crash warnings abound for U.S. markets”).

This means that U.S. banks can expect sky-rocketing losses on their commercial mortgage portfolio (in this $6 trillion market). As I have pointed out in previous commentaries, U.S. banks have virtually nothing set aside for these losses. This was echoed by a presentation from the Federal Reserve to banking regulators last month – and is an “instant replay” of what happened with U.S. banks when the housing market crashed.

The main difference between this new source of mounting losses on this category of bank loans is that unlike with the crash in residential real estate, this crash comes at the same time that all other categories of U.S. debt are already at or near record-levels of delinquencies (i.e. loans where the banks are not getting paid). The combination of huge losses these banks must absorb on commercial defaults while they are not receiving payments from record numbers of borrowers in all other categories of debt, and having virtually no reserves to cover these losses creates a very painful dilemma for the banksters.

As I have stated unequivocally on numerous occasions (and which George Soros just echoed in a recent interview), U.S. big-banks remain insolvent. With new, rising losses and tiny capital cushions, it appears that some or all of them will be forced to get in line for their next series of government blank-cheques. The problem is how can the Wall Street crime syndicate beg for more hand-outs from the government while these fraud-factories claim to be making “profits”?

Once again, the perfect “recipe” for Wall Street appears to be to induce a broad, general panic – which could frighten both the spineless politicians and the American public enough for them to capitulate to more bankster blackmail. Given that most recent, U.S. economic data has still been terrible (despite what media spin-doctors would like us to believe), it would take nothing more than telling the truth to “pop” the U.S. equities bubble – and begin another fear cycle.

As a reminder, John Williams' “Shadowstats.com” (the most widely-accepted source for real numbers on the U.S. economy) has calculated current U.S. unemployment at over 20% (and still rising rapidly). Meanwhile, the fantasy-world presented by the propaganda-machine continues to pretend that things are getting better for the unemployed, and soon-to-be-unemployed.

This disconnect cannot continue. The absolute end-point for the fantasy-rally in U.S. equity markets is early December – the time at which it will clear that this year's holiday shopping season will be a big disappointment for this consumer economy. However, there are an endless number of possible triggers between now and then (including the banksters proclaiming they need more hand-outs). For those who have continued to ignore six solid months of rising insider-selling, it's time to take your money and run.

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written by realist, October 09, 2009

Commercial real estate loans are almost always interest-only loans. When the term of the loan is up, the borrowers typically roll the loan over. With the decline in commercial real estate values, rollovers will be difficult to obtain. If the borrowers have to sell the property to pay off the principal part of the loan, they will not get 100 cents on the dollar. Therefore, it is almost certain that banks are going to have significant losses on their commercial real estate loans. This will cause many more banks to fail or be seized.

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