“Richard Suttmeier’s 2011 Outlook: Pain in the Banks as Housing Falls Another 15-30%”
More than 2 years after the financial crisis, a weak residential and commercial real estate market remains the biggest threat to the economy, according to ValuEngine’s Richard Suttmeier.
Looking out into 2011, Suttmeier warns residential housing could fall another 15-30%. “The housing market is still overpriced relative to where we began the new millennium,” he tells Aaron in this segment. “Prices are still about 50% higher than where we were at the end of 1999.”
That is guaranteed bad news community banks. What’s worse is the amount of commercial real estate loans these community banks still have on their books: $1.43 trillion by Suttmeier’s estimation. “My analysis shows 2,485 or 32% of all banks overexposed to Commercial Real Estate loans,” he writes. “This stress needs to be addressed before jobs can be created on Main Street USA as housing and construction drive local economies.”
The situation is likely to lead to considerable consolidation among banks. For example, Bank of Montreal bought the troubled Midwestern bank Marshall & Ilsey for $4.1 billion on Friday. The good news, Suttmeier says if we see more of these types of deals, “you might relieve some of the structural problems in the banking system.”
Meanwhile, the ‘too big to fail’ banks face their own troubles. These banks have not delevered, Suttmeier notes. In fact, the notional amount of derivative contracts has risen from $71.6 trillion at the end of 2007 to $236.4 trillion at the end of the third quarter. Suttmeier warns this could be another ticking time-bomb.
